Question
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
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
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