An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2021, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity

3,500,000

Fair value of equipment

5,500,000

Residual value - unguaranteed

600,000

Initial direct cost

200,000

Annual rental payable in advance

900,000

Useful life and lease term

8 years

PV of 1 at 12% for 8 periods

0.40

PV of an ordinary annuity of 1 at 12% for 8 periods

4.97

PV of an annuity due of 1 at 12% for 8 period

5.56

Implicit interest rate

12%

First lease payment

January 1, 2021

What amount of cost of goods sold should be recognized in recording the lease?

3,460,000

3,500,000

3,740,000

3,260,000