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
								87,867
1		13,000		0		13,000		74,867
2		13,000		7,487		5,513		69,354
3		13,000		6,935		6,065		63,289
4		13,000		6,329		6,671		56,618
5		13,000		5,662		7,338		49,280
6		13,000		4,928		8,072		41,208
7		13,000		4,121		8,879		32,329
8		13,000		3,233		9,767		22,562
9		13,000		?		?		?
10		13,000		?		?		?

What is the effective annual interest rate? (Round final answer to the nearest whole percentage.)

Multiple Choice

a) 10%.

b) 8%.

c) 7%.

d) 12%.

Answer 1

Answer:

Effective annual interest rate =(7487 /74867)*100 =10%

Answer is option A.