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Sandhill, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $304152, 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. Sandhill, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Sandhill, Inc.) is 7%.
Question 1: Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Sandhill, Inc. in the first year of the asset's life?
PV Annuity Due PV Ordinary Annuity
7%, 4 periods
3.62432 3.38721
10%, 4 periods
3.48685 3.16987
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