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Hi,

There is a condition in the question - "if PV of the lease payments = fair value of the equip. at the inception on the lease"
Meaning consider the value of 10,000 - 2000 (annual Lease) = 8000
Now the beg balance of 2nd year will be 8000 and multiply it by 12% to get 960 as an interest expense -


Good Luck..

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