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
								101,385
1		15,000				15,000		86,385
2		15,000		8,639		6,361		80,024
3		15,000		8,002		6,998		73,026
4		15,000		7,303		7,697		65,329
5		15,000		6,533		8,467		56,862
6		15,000		5,686		9,314		47,548
7		15,000		4,755		10,245		37,303
8		15,000		3,730		11,270		26,033
9		15,000		?		?		?
10		15,000		?		?		?

What would be the outstanding balance after payment 10?

Multiple Choice

$15,000.

$0.

$13,636.

$1,364.

Answer 1

$0.

Working:

Step-1:Calculation of effective interest rate
	Effective Interest rate			=	Interest Expense/Beginning of Year Outstanding Balance
				=	8639/86385
				=	10%
Step-2:Lease amortization table
	Payment	Cash payment			Effective Interest		Decrease in Balance			Outstanding Balance
	8	$       15,000			$       3,730		$       11,270			$       26,033
	9	15,000			2,603		12,397			13,636
	10	15,000			1,364		13,636			-0
	Working:
	Calculation of Interest Expense:
	Payment	Beginning Outstanding Balance			Effective interest rate			Interest Expense		Cash payment		Decrease in Balance			Ending Outstanding Balance
	9	$       26,033			10%			$ 2,603.30		15000		$ 12,396.70				$ 13,636.30
	10	$ 13,636.30			10%			$ 1,363.63		15000		$ 13,636.37				$          -0.07