Use the information below to answer the following questions.

On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

-What is the effective annual interest rate charged to Reagan on this lease?
A) 4%.
B) 6%.
C) 8%.
D) 17%.

Question

Use the information below to answer the following questions.

On December 31, 2017, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2023. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan's lease amortization schedule appears below:

-What is the effective annual interest rate charged to Reagan on this lease?
A) 4%. 
B) 6%. 
C) 8%. 
D) 17%.

Quizplus · Accepted Answer

Effective rate = interest expense/outstanding liability balance.

Use the Information Below to Answer the Following Questions