Question

Present and future value tables of $1 at 11% are presented below.

	PV of $1	FV of $1	PVA of $1	FVA of $1
1	0.90090	1.11000	0.90090	1.0000
2	0.81162	1.23210	1.71252	2.1100
3	0.73119	1.36763	2.44371	3.3421
4	0.65873	1.51807	3.10245	4.7097
5	0.59345	1.68506	3.69590	6.2278
6	0.53464	1.87041	4.23054	7.9129

Titanic Corporation leased executive limousines under terms of $90,000 to be paid at the inception of the lease, and five equal annual payments of $100,000 to each be paid thereafter on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:

Answer 1

Answer

• Amount of lease payable = $ 100,000 for 5 years.
• Present value of annuity of $1 at 11% for 5 years: PVA of $1 = 3.69590
• Amount of finance transaction = 100000 x 3.69590
  = $ 369,590
• First year interest expense = $ 369,590 x 11% = $ 40,654.90 or $ 40,655 = Answer