On January 1, 2010, Kinney Corp. signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the end of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no salvage value. Kinnney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $75,816 at an effective interest rate of 10%.
With respect to this capitalized lease, for 2010 Kinney should record:
a. lease expense of $20,000
b. interest expense of $7,582 and depreciation expense of $10,831
c. interest expense of $7,582 and depreciation expense of $15,163
d. interest expense of $10,000 and depreciation expense of $15,163
With respect to this capitalized lease, for 2011 Kinney should record:
a. interest expense of $4,823 and depreciation expense of $10,831
b. interest expense of $6,340 and depreciation expense of $10,831
c. interest expense of $6,823 and depreciation expense of $10,831
d. interest expense of $7,582 and depreciation expense of $10,831