An eight-year capital lease specifies equal minimum annual lease payments.Part of this payment represents interest and part represents a reduction in the net lease liability.The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease liability should be
A) the same as in the third year.
B) less than in the third year.
C) less than in the fifth year.
D) more than in the fifth year.

Question

Quizplus · Accepted Answer

As the lease progresses, the interest portion of the payment decreases because the outstanding lease liability decreases. Therefore, the portion of the payment that goes towards reducing the net lease liability increases over time. Thus, in the fourth year, this portion is less than in the fifth year.

An Eight-Year Capital Lease Specifies Equal Minimum Annual Lease Payments