Question

A town signs a 10-year capital lease by which it acquires equipment with a market value...

A town signs a 10-year capital lease by which it acquires equipment with a market value of $1 million. The lease incorporates an implicit interest rate of 8% per year. Accordingly, annual lease payments are $149,029. When the town makes its second annual lease payment, it would report in its government wide statements... C Intestest expense of $74,478... I know the answer I just can't figure out how to calculate it.

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Answer #1

Since we have Annual Lease payments of $149,029; let's anaylse it

End of First Year: Town pays a lease payment of $149,029. We also know that Lease payment includes a payment towards Interest and a component towards prinicipal money.

Interest in First Year Installment = $1,000,000 * 8% = $80,000

Amount paid towards Principal = $149,029 - $80,000 = $69,029

Revised pricipal at year-end = $1,000,000 - $69,029 = $930,971

End of Second Year: Town pays a lease payment of $149,029. We also know that Lease payment includes a payment towards Interest and a component towards prinicipal money.

Principal money at beginning of 2nd year = $930,971

Interest @8% = $930,971 * 8% = $74,477.68

Interest $74,478(rounded off to nearest dollar)

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