Knottworth Gedding Consulting leased machinery from Red Inc. on July 1, 2021. The lease was recorded as a finance lease. The present value of the lease payments discounted at 10% was $40.5 million. Ten annual lease payments of $6 million are due each July 1 beginning July 1, 2021. What amount of interest expense from the lease should Knottworth Gedding report in its December 31, 2021, income statement?

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Knottworth Gedding Consulting leased machinery from Red Inc. on July 1, 2021. The lease was recorded as a finance lease. The present value of the lease payments discounted at 10% was $40.5 million. Ten annual lease payments of $6 million are due each July 1 beginning July 1, 2021. What amount of interest expense from the lease should Knottworth Gedding report in its December 31, 2021, income statement?

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Isabel Lang · Answer 1

The answer is: Knottworth Gedding should report $1,725,000 as interest expense in its 12/31/2021 income statement

Explanation:

The formula for calculating the amount of interest expense is:

interest expense = discount rate x (present value - yearly payment) x time

Discount rate = 10% Present value = $40,500,000 Yearly payment = $6,000,000 Time = 6 months / 12 months = 0.5

interest expense = 10% x ($40,500,000 - $6,000,000) x 0.5 = $1,725,000