Option 1 Paying cash. Option 2 Acquiring the equipment by signing a 5 year, 8% interest bearing note of $150,000.Interest is due each 12/31.The $150,000 is due at the end of the 5 years. Option 3 Acquiring the equipment by signing a 5 year, 0% interest bearing note of $220,399 due at the end of five years. Option 4 Acquiring the equipment by signing a 5year installment note with annual payments due each 12/31 of $37,568. Option 5 Leasing the asset ona 5 year lease.Lease payments of $34,786 are due each 1/1.The first payment is due immediately.At the end of the lease the company has the option to acquire the equipment by paying $1.

1 Complete an interest table to support the total amount of interest under each of the options 2-5. Remember: Payment = Face Value x the stated rate of interest Interest Expense = Carrying Value of Liability at the Beginning of the Period x Effective Interest Rate Liability Account (Balance)should always be carried at the present value of the remaining cash flows

Option 2

Date Payment Interest Principal Reduction Liability Balance

12/31/x1

12/31/x2

12/31/x3

12/31/x4

12/31/x5

option 3

Date Payment Interest Principal Reduction Liability Balance

12/31/x1

12/31/x2

12/31/x3

12/31/x4

12/31/x5

option 4

Date Payment Interest Principal Reduction Liability Balance

12/31/x1

12/31/x2

12/31/x3

12/31/x4

12/31/x5

option5

Date Payment Interest Principal Reduction Liability Balance

12/31/x1

12/31/x2

12/31/x3

12/31/x4

12/31/x5

2 Complete the matrix below by determining the following for each option: (a) The total amount that should appear on the balance sheet for the equipment on 1/1/x1. (b) The total outflow of cash over a 5-year period.

(a) (b) (c)

Option Equipment Total Cash Outflow. Total Interest

1

2

3

4

5

3 Which option has the highest total interest expense and why?

For each option(2-5) usethe following t-accounts and post all entries over the 5 year period.(Instead of using a discount account, net any liability and discount account together.Hence, the liability account is always carried at the present value of the remaining cash flows.)