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:
A)$25,631
B)$17,105
C)$27,000
D)$18,473

Question

Quizplus · Accepted Answer

The cost of the asset is calculated by finding the present value of the lease payments and the bargain purchase option. The present value of the lease payments is $3,500 * (PVIFA 12%, 7 years) and the present value of the bargain purchase option is $2,500 * (PVIF 12%, 7 years). Adding these values gives the cost of the asset.

RST Entered into a Direct Financing Lease with ZAB, Which