On January 2, 2013, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,500,000, based on implicit interest of 10%.
In its 2013 income statement, what amount of interest expense should Hernandez report from this lease transaction?
a. $0
b. $93,750
c. $125,000
Answer: D
In its 2013 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?
a. $250,000
b. $200,000
c. $150,000
d. $100,000
d. $150,000
Answer: D
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