Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 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 would be the amount of interest expense recorded with payment 5?
A) $2,000.
B) $893.
C) $7,107.
D) $1,107.

Question

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 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 would be the amount of interest expense recorded with payment 5?

-What would be the amount of interest expense recorded with payment 5?
A) $2,000. 
B) $893. 
C) $7,107. 
D) $1,107.

Quizplus · Accepted Answer

Interest rate = $2,660/$26,600 = 10%
Interest, payment 5 = $8,925 × 10% = $893

Refer to the Following Lease Amortization Schedule