Question
On January 1, 2018, Shelley Corporation signed a ten-year noncancelable lease for certain machinery.The terms of the lease called for Shelley to make annual payments
On January 1, 2018, Shelley Corporation signed a ten-year noncancelable lease for certain machinery.The terms of the lease called for Shelley to make annual payments of $100,000 at the end of each year for ten years with title to pass to Shelley at the end of this period. The machinery has an estimated useful life of 10 years and no salvage value. Shelley uses the straight-line method of depreciation for all of its fixed assets. Shelley accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 6%. With respect to this capitalized lease, Shelley should record interest and depreciation expense for 2018:
A.Interest Expense, $53,681; Depreciation Expense, $44,734
B.Interest Expense, $0 (none); Depreciation Expense, $0 (none)
C.Interest Expense, $40,260; Depreciation Expense, $67,101
D.Interest Expense, $53,681; Depreciation Expense, $10,000
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