Mackey Company acquired equipment on January 1, 1996, through a leasing agreement that required an annual payment of $30,000. Assume that the lease has a term of five years and that the life of the equipment is also five years. The lease is treated as a capital lease, and the FMV of the equipment is $119,781.30. Mackey uses the straight-line method to depreciate its fixed assets. The effective annual interest rate on the lease is 8 percent. REQUIRED:

a. Compute the amounts that would complete the table. Date Balance Sheet Leasehold Interest Depreciation Total Value of Equipment Obligation Expense Expense Expense 1/1/96 12/31/96 12/31/97 12/31/98 12/31/99 12/31/2000 580 Part 4 Liabilities and Stockholders’ Equity: A Closer Look

b. Compute rent expense for 1996-2000 if the lease is treated as an operating lease.

c. Compute total expense over the five-year period under the two methods and comment.