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 outstanding balance after payment 5?
A) $1,818.
B) $2,000.
C) $2,182.
D) $3,818.

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 outstanding balance after payment 5?

-What is the outstanding balance after payment 5?
A) $1,818. 
B) $2,000. 
C) $2,182. 
D) $3,818.

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 Decrease in balance = $8,000 ? $893 = $7,107
Step 4 Ending balance = $8,925 ? $7,107 = $1,818
Or
$1,818 Decrease in balance from payment 6

Refer to the Following Lease Amortization Schedule