Refer to the fol wing lease amortization schedule The payments are made annually
ID: 2338591 • Letter: R
Question
Refer to the fol wing lease amortization schedule The payments are made annually starting with the be nning 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 lite of 12 years. The lease is noncancelable. 101,456 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 7,003 7,564 8,169 8, 822 9,528 10,290 80,453 72,889 64,720 55, 898 46,370 36,079 24,966 5,831 3,710 2,886 10 balance after payment 107 Multiple Choice $14000 $1.037Explanation / Answer
Answer
Effective Interest = Previous outstanding balance x Effective Interest rate.
Now, you can take any payment from 2 to 8 given in the question to calculate the effective interest rate.
Let’s take Payment no. 6 for instance:
Effective Interest = $ 4472
Previous outstanding balance= $ 55898
Effective Interest Rate = 4472/55898 = 0.08 = 8%
Hence, effective Interest rate = 8%
Payment
Cash payment
Effective Interest
Decrease in Balance
Outstanding balance
[A]
[B = 8% of previous outstanding balance]
[C = A - B]
[D = D - C]
8
$ 14,000.00
$ 2,886.00
$ 11,114.00
$ 24,966.00
9
$ 14,000.00
$ 1,997
$ 12,003.00
$ 12,963.00
10
$ 14,000.00
$ 1,037
$ 12,963.00
$ 0.00 = ANSWER
Payment
Cash payment
Effective Interest
Decrease in Balance
Outstanding balance
[A]
[B = 8% of previous outstanding balance]
[C = A - B]
[D = D - C]
8
14000
2886
=14000 - 2886
=36079-11114+1
9
14000
=24966*8%
=14000-1997
=24966-12003
10
14000
=12963*8%
=14000-1037
=12963-12963
Payment
Cash payment
Effective Interest
Decrease in Balance
Outstanding balance
[A]
[B = 8% of previous outstanding balance]
[C = A - B]
[D = D - C]
8
$ 14,000.00
$ 2,886.00
$ 11,114.00
$ 24,966.00
9
$ 14,000.00
$ 1,997
$ 12,003.00
$ 12,963.00
10
$ 14,000.00
$ 1,037
$ 12,963.00
$ 0.00 = ANSWER