On January 1, 2018, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of $180,000 at the beginning of each year for five years with title passing to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $750,578 at an effective interest rate of 10%.

1. With respect to this capitalized lease, for 2019 Ogleby should record

a. interest expense of $57,058 and depreciation expense of $107,225.

b. interest expense of $75,058 and depreciation expense of $107,225.

c. interest expense of $44,764 and depreciation expense of $107,225.

d. interest expense of $62,764 and depreciation expense of $107,225.

2. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Pisa, Inc.s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.57710 3.31213

10%, 4 periods 3.48685 3.16986

a. $344,152

b. $245,666

c. $252,960

d. $273,199

3. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2018 it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments at the end of each year. The equipment has an expected useful life of 5 years. Silver Points incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the amount of interest expense recorded by Silver Point Co. for the year ended December 31, 2018?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. $70,200

b. $56,160

c. $62,400

d. $78,000