CFA Practice Question

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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

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
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