Question

StatMed Corporation leases medical equipment under a five year lease. The terms of the lease call for five equal payments of​ $25,000, with the first payment due at the inception. The interest rate implicit in the lease is​ 13%. The first​ year's interest expense will be:

A. ​$9,667

B. $0

C. ​$21,098

D. ​$11,431

Answer 1

Correct Answer (A) $9667

Explanation and calculations

Schedule of payments and interest

Year	Installments	Principal due	Interest Payment	Principal Payment	Total Due
0	$ 25,000	$   99,362	$     0	$ 25,000	$ 74,362
1	$ 25,000	$   74,362	$ 9,667	$ 15,333	$ 59,029
2	$ 25,000	$   59,029	$ 7,674	$ 17,326	$ 41,703
3	$ 25,000	$   41,703	$ 5,421	$ 19,579	$ 22,124
4	$ 25,000	$   22,124	$ 2,876	$ 22,124	$         0

First Installment is paid at the beginning of the year hence no interest is paid.

See the below given schedule to understand the calculation of Principal amount.

Year	Installments	Discounting factor	Present value
0	$ 25,000.00	1.00000	$          25,000
1	$ 25,000.00	0.88496	$          22,124
2	$ 25,000.00	0.78315	$          19,579
3	$ 25,000.00	0.69305	$          17,326
4	$ 25,000.00	0.61332	$          15,333
			$          99,362

Discounting factor is taken at 13%.