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 is the total interest paid over the term of the lease?
A) $42,000.
B) $8,200.
C) $7,400.
D) $3,460.

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 is the total interest paid over the term of the lease?

-What is the total interest paid over the term of the lease?
A) $42,000. 
B) $8,200. 
C) $7,400. 
D) $3,460.

Quizplus · Accepted Answer

Step 1 Interest rate = 2,660/$26,660 (from payment 2)
Step 2 Interest, payment 1 = 0
Interest, payment 5 = $8,925 × 10% = $893
Step 3 Sum of interest = $7,400
Or
$42,000 (sum of payments) minus $34,600 = $7,400

Refer to the Following Lease Amortization Schedule