Interest expense
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Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2006. The manufacturing cost of the computers was $12 million. This non-cancelable lease had the following terms: Lease payments: $2,466,754 at the beginning of each 6 mo. period, with the first payment being made at 1/1/06. Lease term: 5 years (10 semi-annual payments) No residual value; no bargain purchase option Economic life of equipment: 5 years Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually. Fair value of the computers at 1/1/06: $20 million. What is the interest expense that Lone Star would report on this lease in its 2006 income statement?
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Solution Summary
The solution explains how to calculate the interest expense in relation to lease payments. The total cost are determined.
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Since the lease payments are made semi annually we need to calculate interest for each semi annual payment as carrying value of lease X semi annual rate
The carrying value of lease at the start of lease is the ...
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