Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Payment Cash Payment Effective Interest Decrease in balance Outstanding Balance
87,867
1 13,000 13,000 74,867
2 13,000 7,487 5,513 69,354
3 13,000 6,935 6,065 63,289
4 13,000 6,329 6,671 56,618
5 13,000 5,662 7,338 49,280
6 13,000 4,928 8,072 41,208
7 13,000 4,121 8,879 32,329
8 13,000 3,233 9,767 22,562
9 13,000 ? ? ?
10 13,000 ? ? ?

Required:
a. What is the effective annual interest rate?
b. What would the lessee record as annual amortization on the right-of-use asset using the straight-line method?
c. What is the outstanding balance after payment 9?

Lease Amortization Schedule

a. The effective annual interest rate is:

= 10%.

b. The amount that the lessee would record as annual amortization on the right-of-use asset using the straight-line method is:

= $8,786.70

c. The outstanding balance after payment 9 is:

= $11,818.

Explanation:

a) Data and Calculations:

Payment   Cash Payment    Effective      Decrease      Outstanding

                                             Interest        in balance        Balance

                                                                                             87,867

1                    13,000                                     13,000             74,867

2                   13,000                7,487              5,513            69,354

3                   13,000               6,935             6,065            63,289

4                   13,000               6,329              6,671             56,618

5                   13,000               5,662             7,338             49,280

6                   13,000               4,928             8,072              41,208

7                   13,000                 4,121             8,879             32,329

8                   13,000               3,233             9,767             22,562

9                   13,000               2,256           10,744                11,818

10                 13,000                  1,182            11,818                 0

b) The effective annual interest rate = (1+i/n)^n - 1

where i = stated interest rate

and n = number of compounding periods (10 years)

= Effective interest/Outstanding balance

For example for year 10, the rate = $1,182/$11,818 * 100 = 10%

Using the straight-line method, annual amortization on the right-of-use asset = $87,867/10 = $8,786.70

The outstanding balance after payment 9 = $11,818 which is paid in year 10 with an interest of $1,182.

answer; post closing trial balance;

answer///supply is elastic, and demand is inelastic;