Question

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,100 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

Lease Payment	Cash Payment	Effective Interest			Decrease in Balance			Outstanding Balance
									40,370
1	9,200		??			??			31,170
2	9,200		2,805			6,395			24,776
3	9,200		2,230			6,970			17,805
4	9,200		1,602			7,598			10,208
5	9,200		??			??			??
6	2,100		173			1,927			0

What is the total interest paid over the term of the lease?

Multiple Choice

• $48,100.

• $4,329.

• $7,730.

• $4,486.

Answer 1

Solution:

Option: $7730

Workings:

To calculate the total interest paid, we need to complete the amortization table. Interest rate is found out by dividing the interest paid on the outstanding balance = 2805/31170 =9%. Having found the interest rate we can complete the table

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