In an eight-year finance lease, the portion of the annual lease payment that represents interest in the lease's third year payment is:

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Since interest is computed on the beginning balance of the liability account, as that balance is reduced, the interest component of subsequent payments is reduced. The interest portion of the payment in the third year will therefore be less than the interest portion of the payment in the second year.

In an Eight-Year Finance Lease, the Portion of the Annual