1. Sunland, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $404,152, 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. Sunland, Inc.s incremental borrowing rate is 9% and the rate implicit in the lease(which is known by Sunland, Inc.) is 7%. Assuming that this lease is properly classified as a finance lease, what is the amount of the net Lease Liability reduction recorded from the first year of interest expense and the second lease payment combined?

PV annuity due PV ordinary annuity

7%, 4 periods 3.62432 3.38721

9%, 4 periods 3.53129 3.23972

1. $308,326
2. $329,908
3. $404152.
4. $273,327

2. On January 1, 2021, Cullumber Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Cullumber to make annual payments of $185,000 at the beginning of each year for 5 years, and contains a bargain purchase option. The equipment has an estimated useful life of 7 years and no salvage value. Cullumber uses the straight-line method of depreciation for all of its fixed assets. Cullumber accordingly accounts for this lease transaction as finance lease. The lease payments were determined to have a present value of $758,953 at an effective interest rate of 11%. With respect to this capitalized lease, for 2021 Cullumber should record:

1. Interest expense of $63,135 and amortization expense of $151,791.
2. Interest expense of $63,135 and amortization expense of $108,422.
3. Interest expense of $101,750 and amortization expense of $191,907
4. Rent expense of $185,000.