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Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $180,000, 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. Pirate, 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 Pirate, Inc. in the first year of the asset's life?

PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.5771 3.31213
10%, 4 periods 3.48685 3.16986

a) $37,110

b) $47,695

c) $0

d) $51,510

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  • Category:- Accounting Basics
  • Reference No.:- M948663

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