A finance lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment on July 1, the beginning of the lease. The annual interest rate is 8%. Both the present value of the lease payments and the cost of the asset to the lessor are $150,000. Required: a. Prepare a partial amortization table up to the October 1 payment. b. What would be the amount of interest expense (revenue) the lessee (lessor) would record in conjunction with the second quarterly payment on October 1?

a. The preparation of partial amortization is shown below:-

b. $2,892

Explanation:

a. DateLease  Effective        Decrease in  Outstanding              

             payment     interest           balance          balance

July 1                                                                           $150,000

July 1     $5,376                                  $5,376             $144,624

                                                                                ($150,000 - $5,376)

Oct 1      $5,376       $2,892              $2,484              $142,140

                                                       ( $5,376 - $2,892) ($144,624 - $2,484)

b. Interest expense on October 1 = $2,892

Working Note:-

Take the outstanding balance times 2% (8% annual = 2% quarterly)

So, the Effective interest = $144,624 × 0.02

= $2,892.48

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