K Corporation agreed to lease a computer, at cost, to L Company for $36,000 payable each year-end for seven years without a bargain purchase option, or, as an equivalent alternative, for $33,000 per year with a bargain purchase option, after the seventh rental. If the lease is a direct financing lease, and K expects to earn a 12 percent return, the amount of cash L Company would need to pay for the bargain purchase option is
A) $30,266.
B) $26,340.
C) $21,000.
D) $9,948.

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the seven annual payments of $33,000 at 12% is $182,734. The present value of the bargain purchase option is $30,266, which is the difference between the present value of the seven annual payments of $36,000 at 12% ($213,000) and the present value of the seven annual payments of $33,000 at 12% ($182,734).

K Corporation Agreed to Lease a Computer, at Cost, to L