Question

A $2,300 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. What is the total interest paid over the term of the lease

Answer 1

Complete Question:

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,600 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years.

Lease          Cash       Effective     Decrease in    Outstanding

Payment  Payment     Interest           Balance      Balance

                                                                                   41,236  

1                 8,800                ??                ??                32,436  

2                8,800          1,946           6,854                25,582  

3                8,800          1,535           7,265                  18,317  

4                8,800          1,099            7,701                 10,616  

5               8,800                ??                 ??                       ??  

6               2,600             147            2,453                       0

Answer:

Total interest paid over the term of the lease is:

= $5,364

Explanation:

a) Data and Calculations:

Lease          Cash       Effective     Decrease in    Outstanding

Payment  Payment     Interest           Balance      Balance

a)                   b)               c)                 d)                        e)

                                                                                   41,236  

1                 8,800                0            8,800               32,436  

2                8,800          1,946           6,854               25,582  

3                8,800          1,535           7,265                 18,317  

4                8,800          1,099            7,701                10,616  

5               8,800             637            8,163                 2,453  

6               2,600             147            2,453                       0

c) Effective interest rate = 6%( $1,946/$32,436 * 100)

d) Decrease in balance = (b) - (c)

e) Outstanding balance = Outstanding Balance minus (d)

Total interest paid over the term of the lease = $5,364