Question

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year.

(b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.

(c) Alt depreciates all machinery it owns on a straight-line basis.

(d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Alt accounts for the lease as an operating lease, what expenses will be recorded as a consequence of the lease during the fiscal year ended December 31, 2021?

a. Amortization Expense

b. Lease Expense

c. Interest Expense

d. Amortization Expense and Interest Expense

Answer 1

In operating lease, the lessee records lease expense every year of the amount that it pays to the lessor as lease rental.

When the lease is capital lease, amortization expense and interest expense is recorded every year.

So, here in this case correct answer is b. Lease Expense as Alt accounts for the lease as an operating lease.