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On January 1, 2016, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a…

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On January 1, 2016, Mary Company leased equipment, signing a five-year lease that requires annual lease payments of $20,000. The lease qualifies as a capital lease. The payments are made at year-end, and the first payment will be made at December 31, 2016. In addition, Mary guarantees the residual value to be $8,000 at the end of the lease term. Mary correctly uses the lessor’s implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows:

Present value of $10.567427

Present value of ordinary annuity of $13.604776

What is the amount of interest expense associated with the leased equipment for the year ending December 31, 2016?

$2,400

$9,196

$8,651

$20,000

 

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