Pralow,Inc. ,leased an asset to Bender Corporation.The cost of the asset to Pralow was $8,000.Terms of the lease specify four-year life for the lease,an annual interest rate of 15 percent,and four year-end rental payments.The lease qualifies as a capital lease and is classified as a direct-financing lease.The asset reverts to Pralow after the fourth year,when its residual value is estimated to be $1,000.The amount of each rental payment is
A) $2,000.
B) $2,335.
C) $2,501.
D) $2,602.

Question

Quizplus · Accepted Answer

The correct rental payment amount can be calculated using the present value of an annuity formula, considering the cost of the asset to Pralow ($8,000), the residual value ($1,000), the annual interest rate (15%), and the lease term (4 years). The calculation involves finding the annual payment that would amortize the net investment in the lease (cost minus residual value, adjusted for interest) over the lease term. The correct answer, $2,602, reflects the payment that satisfies these conditions.