- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 25. Non-Current (Long-term) Liabilities
- Subject 8. Accounting and Reporting by the Lessee

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**CFA Practice Question**

On January 2, 2015, Heather Ltd. signed a ten-year non-cancelable lease for a passenger ferry. The lease stipulated annual payments of $70,000 starting at the end of the first year, with title passing to Heather at the expiration of the lease. Heather treated this transaction as a capital lease.

The ferry has an estimated useful life of 15 years, with no residual value. Heather uses straight-line amortization for all of its capital assets. Aggregate lease payments were determined to have a present value of $420,000, based on implicit interest of 10%.

In its 2015 income statement, what amount of amortization expense should Heather report from this lease transaction?

A. $46,667

B. $42,000

C. $28,000

**Explanation:**The amortization expense would be the present value of the lease divided by the estimated useful life. $420,000 / 15 = $28,000

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**User Contributed Comments**
4

User |
Comment |
---|---|

shasha |
amort. exp. means "depreciation exp." total exp. = amort exp. + interest exp. = 28,000 + 7,000 = $35,000 |

americade |
Or $420k X 10% = $42k $72k - $42k = $28k |

wundac |
Where are you getting the $72k from???? |

clarelau |
Shasha, i think Total exp.=amort exp.+interest exp.=28000+420000*0.1=28000+42000=7000 |