Shipping R US (LESSEE) leased an ocean-liner freighter from Viking Ships (LESSOR) that transfers ownership to the lessee at the end of the lease. This is non-cancelable and requires beginning of the year (annuity due) payments of $1,429,843.99 for 5 years. Shipping R USs incremental borrowing rate is 6%, but knows that Viking Ships used a 5% present value rate in determining the annual lease payments. Viking Ships manufactured the ocean-liner freighter for a cost of $6,000,000, which has an estimated useful life of 10 years. Shipping is required to pay all executor costs, such as insurance, maintenance and taxes, but did not guarantee the residual value of the ocean-liner freighter. Shipping R US uses the strait line depreciation method for all of its depreciable assets.

3. With respect to this capitalized lease for year 1 Shipping R US should record [8 points]

a. Interest expense of $0 and depreciation of $1,300,000.

b. Interest expense of $309,524 and depreciation expense of $1,238,095.

c. Interest expense of $0 and depreciation expense of $650,000.

d. Interest expense of $0 and depreciation expense of $600,000.

4. With respect to this capitalized lease, for year 2 Shipping R US should record [8 points]

a. Interest expense of $253,508 and depreciation expense of $600,000

b. Interest expense of $228,508 and depreciation expense of $600,000

c. Interest expense of $253,508 and depreciation expense of $1,238,095

d. Interest expense of $253,508 and depreciation expense of $1,300,000