On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50, 000, beginning December 31, 2010.The lease qualifies as an operating lease.Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. Rounded to the nearest dollar, interest and rent expenses for 2010 would be
$$0$50,000\begin{array}{llr} & \text { Interest }&\text { Rent } \\\text { I. } & \$ 50,000&\$0 \\\text { II. } & \$ 0 &\$22,430\\\text { III. } & \$ 22,430&\$50,000 \\\text { IV. } & \$ 0&\$50,000\end{array}$

A) I
B) II
C) III
D) IV

Question

On January 1, 2010, Becky Company signed a lease agreement requiring six annual payments of $50, 000, beginning December 31, 2010.The lease qualifies as an operating lease.Becky's incremental borrowing rate was 9% and the lessor's implicit rate, known by Becky, was 10%.The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. Rounded to the nearest dollar, interest and rent expenses for 2010 would be

$0$50,000\begin{array}{llr} & \text { Interest }&\text { Rent } \\\text { I. } & \$ 50,000&\$0 \\\text { II. } & \$ 0 &\$22,430\\\text { III. } & \$ 22,430&\$50,000 \\\text { IV. } & \$ 0&\$50,000\end{array}

A) I
B) II
C) III
D) IV

george souris · Accepted Answer

Final Answer : D, Explanation :  Since the lease is classified as an operating lease, the entire lease payment is recognized as rent expense in the period it is paid. There is no separate interest expense recognized for operating leases. The first payment of $50,000 is made on December 31, 2010, and is recognized as rent expense for 2010.

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