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How much depreciation expense will be recognized

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Question - On January 1, 20X6, Mega Corp. leased dental equipment to Smile Dentistry Corp. Pertinent details follow:

The lease term is five years.

The economic life of the dental equipment is seven years. The residual value at that time is $0.

Mega offers its customers the choice of leasing the equipment or purchasing it for $90,000 cash.

Smile Dentistry is required to make annual payments of $21,159 including non-lease costs of $2,000, with the first payment due one year after the inception of the lease (January 1, 20X7).

Smile Dentistry has the option to purchase the equipment at the end of the lease term for $9,000.

The implicit rate in the lease, which is not known by Smile Dentistry, is 5%.

Smile Dentistry's incremental borrowing rate for transactions of this nature is 4%.

Smile Dentistry has determined that the option to purchase represents a bargain purchase option (BPO).

Assuming that Smile Dentistry depreciates its dental equipment on a straight-line basis, and does not elect to account for the lease and non-lease components in the contract as a single lease component, how much depreciation expense will be recognized in its financial statements for the year ended December 31, 20X6?

 

Reference no: EM132604964

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