ABC INC.entered into a direct financing lease with QRS to rent a machine that cost $157,895.The lease term was for six years.The annual rentals are payable at the end of each year, and ABC INC.expects to earn a 14 percent rate of return.The required amount of the annual rentals is (rounded to the nearest dollar):
A)$30,000
B)$40,604
C)$46,288
D)$36,600

Question

Quizplus · Accepted Answer

The correct answer is found by calculating the annual lease payment required to amortize the cost of the machine ($157,895) over the lease term (6 years) at the lessor's implicit rate of return (14%). Using the formula for the present value of an annuity or a financial calculator, the annual rental payment is approximately $40,604.

ABC INCEntered into a Direct Financing Lease with QRS to Rent