Question

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

Payment		Cash Payment		Effective Interest		Decrease in balance		Outstanding Balance
								108,703
1		15,000				15,000		93,703
2		15,000		7,496		7,504		86,199
3		15,000		6,896		8,104		78,095
4		15,000		6,248		8,752		69,343
5		15,000		5,547		9,453		59,890
6		15,000		4,791		10,209		49,681
7		15,000		3,974		11,026		38,655
8		15,000		3,092		11,908		26,747
9		15,000		?		?		?
10		15,000		?		?		?

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

A. $93,703.

B. $150,000.

C. $108,703.

D. $41,295.

Answer 1

Effective annual interest rate = 7,496 / 93703 = 8%

Payment		Cash Payment		Effective Interest		Decrease in balance		Outstanding Balance
								108,703
1		15,000				15,000		93,703
2		15,000		7,496		7,504		86,199
3		15,000		6,896		8,104		78,095
4		15,000		6,248		8,752		69,343
5		15,000		5,547		9,453		59,890
6		15,000		4,791		10,209		49,681
7		15,000		3,974		11,026		38,655
8		15,000		3,092		11,908		26,747
9		15,000		2,139		12,861		13886
10		15,000		1,114		13,886		0
Total				$41,298

total effective interest paid over the term of the lease =$41,298 (approx)

Option D. $41,295 is correct answer.