Question

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. The 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 non-cancelable.

Payment Cash
Payment Effective
Interest Decrease
in balance
Balance
63,282
1 10,000 10,000 53,282
2 10,000 6,394 3,606 49,676
3 10,000 5,961 4,039 45,638
4 10,000 5,477 4,523 41,114
5 10,000 4,934 5,066 36,048
6 10,000 4,326 5,674 30,373
7 10,000 3,645 6,355 24,018
8 10,000 2,882 7,118 16,901
9 10,000 ? ? ?
10 10,000 ? ? ?
1. What is the effective annual interest rate?
a.12%.
b. 9%.
c. 11%.
d. 10%.
2. What would the lessee record as annual amortization on the right-of-use asset using the straight-line method?
a. $5,328.
b. $6,328.
c. $6,392.
d. $10,000.
3. What is the outstanding balance after payment 9?
a. $5,000.
b. $5,537.
c. $8,929.
d. $13,463.

Answer 1

The effective annual interest rate is approximately 10.3%. The annual amortization on the right-of-use asset using the straight-line method is $833.33. The outstanding balance after payment 9 is $14,019.

Step-by-step explanation:

The effective annual interest rate can be determined by finding the sum of all the effective interest rates for each payment and then converting it to an annual rate. Using the given lease amortization schedule, we can calculate the effective annual interest rate to be approximately 10.3%.

The annual amortization on the right-of-use asset using the straight-line method can be calculated by dividing the total amount of lease payments by the expected economic life of the asset. In this case, the annual amortization would be $10,000 / 12 years = $833.33.

The outstanding balance after payment 9 can be found by subtracting the decrease in balance for payment 9 from the balance after payment 8. From the given schedule, the decrease in balance for payment 9 is $2,882 and the balance after payment 8 is $16,901. Therefore, the outstanding balance after payment 9 is $14,019.