Question

Ajax entered into a four-year finance lease that specifies eight equal minimum semi-annual lease payments. Each payment is composed of two things: interest expense and a reduction in the net lease liability. The portion of the fourth lease payment applicable to the reduction of the net lease liability should be

Question 10 options:

	less than in the fifth payment.
	more than in the fifth payment.
	less than in the third payment.
	the same as in the third payment.

Answer 1

In case of equal installment payment for lease, initial installments comprise of higher interest payment & lower reduction in net liability.

But in subsequent Installment, Interest Payment component will decrease & reduction in net liability increases.

So in each subsequent installment interest payment component is less than previous installment & Principle payment component is more than previous installment.

Hence The portion of the fourth lease payment applicable to the reduction of the net lease liability should be less than the fifth payment

Option 1 is correct

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