Question

Brecker Company leases an automobile with a fair value of \(10,906 from Emporia Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.
2. Rental of \)250 per month (at end of each month). (The present value at 1% per month is \(9,800.)
3. Estimated residual value after 50 months is \)1,180. (The present value at 1% per month is \(715.) Brecker Company guarantees the residual value of \)1,180.
4. Estimated economic life of the automobile is 60 months.
5. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia’s implicit rate.

Instructions

(e) Record the first month’s lease payment.

Short answer

Answer

The interest expense is $105.

Step-by-step solution

Meaning of Interest Expense

The cost spent by a company for the use of another firm's resources, usually in the form of a loan, is known as interest expense. The interest rate, debt terms, and payment structure are all outlined in loan agreements.

Recording the first month’s lease payments

Date	Particular	Debit ($)	Credit ($)
	Lease Liability	145
	Interest Expense	105
	Cash		250

Working Note:

Calculation of Interest expense

$\begin{array}{rcl}\text{Interest}\text{expense}& =& \text{Leased}\text{equipment}\times \text{Present}\text{value}\text{rate}\\ & =& \$10,515\times 1\%\\ & =& \$105\end{array}$