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On January 1, 2013, Martin Corporation signed a ten-year noncancelable lease for machinery. The terms of the lease called for Martin to make annual payments of $350,000 at the end of each year for ten years with title to pass to Martin at the end of this period. The machinery has an estimated useful life of 20 years and no salvage value. Martin uses the straight-line method of depreciation for all of its fixed assets. Martin accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,977,577 at an effective interest rate of 12%. With respect to this capitalized lease, Martin should record for 2013:

a) Depreciation expense of $197,758 and interest expense of $420,000.

b) Depreciation expense of $197,758 and interest expense of $237,309.

c) Depreciation expense of 98,879 and interest expense of $237,309.

d) Lease expense of $350,000.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M947437

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