On January 2, Cole Co. signed an 8-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of each year. The machine has a useful life of 12 years with no salvage value. Title passes to Cole at the lease expiration date. Cole uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 2 of $108,000, based on an appropriate rate of interest. For the current year, Cole should record depreciation (amortization) expense for the leased machine at

Answer (B) is correct. This lease qualifies as a capital lease because title passes to the lessee at the end of the lease term. When a lease is capitalized because title passes to the lessee at the end of the lease term or because the lease contains a bargain purchase option, the depreciation (amortization) period is the estimated economic life of the asset. The asset should be depreciated (amortized) in accordance with the lessee’s normal depreciation policy for owned assets. Cole normally uses the straight-line method. Thus, depreciation (amortization) expense is $9,000 [($108,000 leased asset – $0 salvage value) ÷ 12-year economic life].