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
								69,952
1		10,000				10,000		59,952
2		10,000		5,396		4,604		55,348
3		10,000		4,981		5,019		50,330
4		10,000		4,530		5,470		44,859
5		10,000		4,037		5,963		38,897
6		10,000		3,501		6,499		32,397
7		10,000		2,916		7,084		25,313
8		10,000		2,278		7,722		17,591
9		10,000		?		?		?
10		10,000		?		?		?

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

Multiple Choice

• $69,952.

• $100,000.

• $59,952.

• $30,048.

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
								83,943
1		12,000				12,000		71,943
2		12,000		6,475		5,525		66,418
3		12,000		5,978		6,022		60,395
4		12,000		5,436		6,564		53,831
5		12,000		4,845		7,155		46,676
6		12,000		4,201		7,799		38,877
7		12,000		3,499		8,501		30,376
8		12,000		2,734		9,266		21,109
9		12,000		?		?		?
10		12,000		?		?		?

What would be the outstanding balance after payment 10?

Multiple Choice

• $991.

• $0.

• $12,000.

• $11,009.

Answer 1

1.

Interest Rate = Interest Paid in any Payment / Previous Outstanding Balance = $5396 / $59952 = 9.00%

Thus Effective Interest Rate = $30048 Option D

2.

As the Loan term is 10 years and the amortization table has been prepared accordingly, The Balance will be $0 for sure. Option B