RST entered into a direct financing lease with ZAB,which called for seven annual rentals of $3,500 (interest rate 12 percent)to be paid at the end of each year.The lease also contained a bargain purchase option allowing ZAB to purchase the asset for $2,500 after making the seventh annual rental payment.The cost of the asset must have been:

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The present value of the lease payments is $17,105. This is calculated as follows:PV = $3,500 x (1 - (1 + 0.12)^-7) / 0.12 = $17,105The cost of the asset must be equal to the present value of the lease payments plus the present value of the bargain purchase option. The present value of the bargain purchase option is $2,500 / (1 + 0.12)^7 = $1,128. Therefore, the cost of the asset must be $17,105 + $1,128 = $18,233.

RST Entered into a Direct Financing Lease with ZAB,which Called