Reference no: EM132514184

Question - On January 2, 2019, Cambridge Ltd. signed a ten-year non-cancellable lease for a heavy-duty drill press. The lease required annual payments of $35,000, starting December 31, 2019, with title passing to Cambridge at the end of the lease. Cambridge is accounting for this lease as a capital (finance) lease. The drill press has an estimated useful life of 20 years, with no residual value. Cambridge uses straight-line depreciation for all its plant assets. The lease payments were determined to have a present value of $215,000, based on an implicit interest rate of 10%.

1. On their 2019 income statement, how much interest expense should Cambridge report in connection with this lease?

a) $0

b) $13,125

c) $17,500

d) $21,500

2. On their 2019 income statement, how much depreciation expense should Cambridge report in connection with this lease?

a) $10,750

b) $17,500

c) $21,500

d) $35,000