You are currently reviewing the following information for JKL Corp ...

By Investopedia Staff AAA
Q:
You are currently reviewing the following information for JKL Corp:
Starting date of lease:
January 1st, 2002
Annual year-end lease payments:
$32,000
Term of Lease:
5 years
Buy-back value at end of term:
$55,000
Interest rate implicit on the lease:

11%

Interest rate on company's general debt:
13%

If the company uses the capitalized lease method of accounting, what would be the interest expense during the second year of the inception of the lease?
A) $14,906
B) $16,600
C) $15,750
D) $14,490
A:

The correct answer is: A)

Year
Lease Payments
Interest Expense
BV of Lease
0
$150,909
1
$32,000
$16,600
135,509
2
32,000
14,906
118,415
3
32,000
13,025
99,440
4
32,000
10,938
78,378
5
32,000

8,622

55,000

Interest Expense = (Book Value of Capitalized Lease at beginning of period) x (Effective Interest Rate)
Step 1: Beginning Book Value of Capitalized Lease = present value of lease + present value of the buy-back value.
TI BAII:
Present value of buy-back value
FV = -55,000
I = 11%
N = 5
CPT PV = 32,640
Present value of lease
PMT = -32000
I = 11%
N = 5
CPT PV = 118,269
Book value = 32,640 + 118,269 = $150,909
Step 2: Interest Expense = Previous BV of lease x interest rate

We'll show just the first figure for this step:
= 150909 x 11% = $16,600
Step 3: Book value = Previous BV of lease - lease payment + interest expense
Again, we'll run an example of the first figure for this step:
Book Value (year 1) = 150909 - 32000 + 16600 = $135,509
Therefore, the interest expense during the second year of the lease would be $14,906 (135509 x 11%).


RELATED FAQS

  1. The Shur-Gro variable annuity uses an AIR of 3% for those contract holders who are ...

    The correct answer is b. Any time the actual growth rate of the separate account exceeds the account’s AIR, the payment will ...
  2. Sometimes investment banking firms allocate shares of hot issues to the personal ...

    The correct answer is a) Spinning is the act of selling hot issues to the personal accounts of corporate officers which in ...
  3. Donald has been putting aside money for his retirement into a Roth IRA for six years.  Although ...

    The correct answer is A) In a Roth IRA, there is no required distribution date as there is in a traditional IRA.
  4. A 7-year, 6% coupon callable bond is currently trading at 96.25.  The ...

    Free info on financial certification exams including study guides, exam questions, and much more!
RELATED TERMS
  1. No results found.

You May Also Like

Related Articles
  1. No results found.
Trading Center