Interest Expense for a Lease

[Tartaglia]

Hi everyone,
I am having some difficulties with the following question (from Investopedia):
You are currently reviewing the following information for JKL Corp.:

Starting date of lease:
Jan 1st, 2002
Annual year-end lease payments:
$32,000
Term of Lease:
5 years
Buy-back value at end of term:
$55,000
Interest rate implicit on the lease:
11%
Interest rate on company’s general debt:
13%
If the company uses the capitalized lease method of accounting, what would be the interest expense during the second year of the inception of the lease?
A) $14,490
B) $15,750
C) $14,906
The Right Answer is a. Your answer was c, and was incorrect.

Explanation:
Interest expense = (Beginning Book Value of Capitalized Lease) x (Effective interest rate)
= (131,727) x (11%)
= $14,490

Why are they using the book value of the asset to compute the interest expense. Instead, I would have computed the value of lease liability in the second year as:
150,909+ 150,909*0.11 -32,000= PV- PV*int -LeasePayment=135,508.47
And then I would have multiplied that number to get the 2nd year interest expense:
134,443.47*0.11=14,905.93
Using the AMORT function on the calulator, I also get that numer for the 2nd year. Isn’t this the correct approach?

 

[S2000magician]

You’re correct: the answer is $14,906.
Investopedia has a number of errors; don’t rely on their answers.

 

[Tartaglia]

Thanks so much S2000!!!
Agreed, I will focus on other sources for questions from now on. I don’t think it can get worse than Investopedia anywhere.
As long as we are on the topic, the newest gem I discovered:
IAS GAAP
Which of the following statements is (are) true with respect to the classification of dividends and interest when constructing a statement of changes in cash flow?
I. Under IAS GAAP, dividends received may only be classified as cash flow from operations.
II. Interest received can only be treated as cash flow from operations under U.S. GAAP.
III. Interest paid can only be treated as cash flow from financing when using IAS GAAP.
IV. Dividends paid may be treated as part of cash flow from operations when using IAS GAAP.
A) I and IV only
B) I, II and III only
C) I and III only
D) II and IV only
The Right Answer is d. Your answer was correct!
Choice I is incorrect because under IAS GAAP, dividends received may either be classified as cash flow from operations or as cash flow from investing activities. Choice III is incorrect because interest paid can either be treated as cash flow from financing or as cash flow from operations when using IAS GAAP.