Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease.The interest rate implicit in the lease is 11%.The first year's interest expense would be:
A)$13,200.
B)$10,238.
C)$33,200.
D)$15,543.

Question

Quizplus · Accepted Answer

To calculate the interest expense for the first year, we need to first calculate the present value of the lease payments:
PV = $20,000 + $30,000/(1+0.11) + $30,000/(1+0.11)^2 + $30,000/(1+0.11)^3 + $30,000/(1+0.11)^4
PV = $20,000 + $26,936.17 + $23,085.02 + $19,732.74 + $16,827.37
PV = $106,581.30

The first year's interest expense is equal to the interest rate multiplied by the remaining balance of the lease payments, which is the PV minus the down payment:
Interest expense = 0.11 x ($106,581.30 - $20,000)
Interest expense = $9,838.95
Rounding this to the nearest dollar, we get $10,238 as the answer.

Titanic Corporation Leased Executive Limos Under Terms of $20,000 Down