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Amount of depreciation and interest expense

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Petry Co, a dealer in machinery and equipment, leased equipment to Geier Inc on July 1, 2004. The lease is appropriately accounted for as a sale by Petry and as a purchase by Geier. The lease is for a 10 year period (the useful life of the asset) expiring June 30, 2014. The first of 10 equal annual payments of $828,000 was made on July 1, 2004. Petry had purchased the equipment for $5,200,000 on January 1, 2004, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2004, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000.

Assuming that Geier, Inc uses straight line depreciation, what is the amount of depreciation and interest expense that Geier should record for the year ended December 31, 2004?

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The solution explains the calculation of the amount of depreciation and interest expense.

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Geier will record the asset at the present value of the lease payments. On July 1, 2004, the leased asset will be recorded in the books at $6,000,000. The life is 10 years and straight line ...

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