I am reading Example 19 | Solved problem | Page 502 | Curriculum Book 3 | Chapter : Long-lived Assets…
I was able to calculate the interest expense due on Jan 1 of each year. However, later, Curriculum says that Interest expense for the first year is $7132 for CAPBS’ interest expense instead of $0 while comparing finance lease vs. operating lease for CAPBS vs. OPIS. I am a little confused. Why did they advance interest expenses by one year? Can someone please help me? (The calculator says the interest expense for the first year should be $0. Because of copyright issues, I cannot type the question here.)
I’d truly appreciate any help I can get. I am stuck.
This sentence explains your difficulty.
There is no interest expense due Jan 1 of each year; there is an interest _ payment _ due. The expense is accrued throughout the year as you use money borrowed from someone else.
Remember, under accrual accounting expenses are recognized when they are incurred, not when they are paid.
Thank you so much, S2000magician. Your responses are extremely helpful. Do you think that curriculum should have used the word “Interest Payment” for the table (first table from the top) on page 504, where they have compared “expenses” for CAPBS and OPIS? In the entire example, they have used the word “expense” for payments due on Jan 1. I’d appreciate your thoughts.