Mackey Company acquired equipment on January 1, 2011, through a leasing agreement that required an annual payment of $30,000. Assume that the lease has a term of five years and that the life of the equipment is also five years. The lease is treated as a capital lease, and the FMV of the equipment is $119,781. Mackey uses the straight-line method to depreciate its fixed assets. The effective annual interest rate on the lease is 8 percent.
REQUIRED:
a. Compute the amounts that would complete the table:
b. Compute rent expense for 2011-2015 if the lease is treated as an operating lease.
c. Compute total expense over the five-year period under the two methods and comment.