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Animal, Inc. leased equipment from Zoo Enterprises under a 4-year lease requiring equal annual payments of $48,000, 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. Animal, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Animal, Inc. in the first year of the asset's life?

PV Annuity Due PV Ordinary Annuity
8%, 5 periods 4.31213 3.99271
10%, 5 periods 4.16986 3.79079

a) 0

b) $16,559

c) $12,719

d) $15,332

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M946085

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