OTF leased a facility to carry out the spray-painting of furniture and moved into the new premises
Question:
OTF leased a facility to carry out the spray-painting of furniture and moved into the new premises at the beginning of the year. The building belongs to a private developer, LAW Properties Inc. (LAW). LAW and OTF signed a lease effective January 1, 2023. The building met OTF's requirements perfectly for the spray-painting equipment. OTF would have liked to have purchased the building, but LAW did not want to sell it. I have summarized the terms of the lease agreement below. The fair value of the building at January 1, 2023, was $1,200,000, as determined by an independent appraiser. OTF normally depreciates buildings on a straight-line basis over their useful life. I included the lease payments in rent expense for the current year-end financial statements.
The lease term is 15 years, with annual payments of $98,000.
The first payment was made on January 1, 2023. All other payments will be payable on January 1 of each year for the lease term.
LAW is responsible for building maintenance.
The property has a remaining useful life of 35 years.
OTF's borrowing rate is 5%. The residual value of the facility at the end of the lease term is estimated to be $500,000.
What would be the interest expense?
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay