Rawlings Company entered into a direct-financing lease with Zubin Corporation, which called for seven annual rentals of $3,500 at an interest rate of 12 percent. The payments are to be paid and the end of each year. The lease also contained a bargain purchase option allowing Zubin to purchase the asset for $2,500 after making the seventh annual rental payment.
What was the cost of the asset?
A) $17,104
B) $18,473
C) $25,631
D) $27,000

Question

Quizplus · Accepted Answer

The cost of the asset is the present value of the lease payments plus the present value of the bargain purchase option. The present value of the lease payments is $17,104. The present value of the bargain purchase option is $1,369. Therefore, the cost of the asset is $17,104 + $1,369 = $18,473.

Rawlings Company Entered into a Direct-Financing Lease with Zubin Corporation