D is corrent. The first payment (paid on the date the lease is signed) contains no interest and is, therefore, all reduction of principal. The second payment includes interest of $57,600 (10% x $576,000) and principal of $42,400 ($100,000 – $57,600). Note that because Howe’s implicit interest rate of 10% is known by Bond and is lower than Bond’s incremental rate, it is used to compute the interest payment.
A is incorrect. The first payment (paid on the date the lease is signed) contains no interest and is, therefore, all reduction of principal. The second payment includes interest of $57,600 (10% x $576,000) and principal of $42,400 ($100,000 – $57,600). Note that because Howe’s implicit interest rate of 10% is known by Bond and is lower than Bond’s incremental rate, it is used to compute the interest payment.
B is incorrect. The first payment (paid on the date the lease is signed) contains no interest and is, therefore, all reduction of principal. The second payment includes interest of $57,600 (10% x $576,000) and principal of $42,400 ($100,000 – $57,600). Note that because Howe’s implicit interest rate of 10% is known by Bond and is lower than Bond’s incremental rate, it is used to compute the interest payment.
A is incorrect. The first payment (paid on the date the lease is signed) contains no interest and is, therefore, all reduction of principal. The second payment includes interest of $57,600 (10% x $576,000) and principal of $42,400 ($100,000 – $57,600). Note that because Howe’s implicit interest rate of 10% is known by Bond and is lower than Bond’s incremental rate, it is used to compute the interest payment.
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