Question

Carla Vista Corporation is a lessee with a finance lease. The asset is recorded at $1040000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $370000 at the end of 5 years, and a fair value of $135000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term. What amount of amortization expense would the lessee record for the first year of the lease

Answer 1

Answer:

The amount of amortization expense the lessee would record for the first year of the lease is $131,125.

Explanation:

Since the lease agreement provides for the transfer of title of the asset to the lessee at the end of the lease term, this implies that the calculation of the amount of amortization expense the lessee would record will be based on the economic life of the asset. Therefore, we have:

First year amortization expense = (Amount at which the asset is recorded - Fair value at the end of 8 years) / Economic life of the asset = ($1,040,000 - $135,000) / 8 = $131,125