Daniels Company Entered into a Direct-Financing Lease with Old 7

question 76

Multiple Choice

Daniels Company entered into a direct-financing lease with Old 7 Corporation,which called for seven annual rentals of $3,500 at an interest rate of 12 percent.The payments are to be paid at the end of each year.The lease also contained a bargain purchase option allowing Old 7 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

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Definitions:

Cash Basis

A bookkeeping practice in which income and outgoings are documented at the point of actual transaction, instead of when they are accrued.

Investing Activities

Transactions involving the purchase or sale of long-term assets and investments not related to the entity's primary business operations.

Financing Activities

Activities that result in changes in the size and composition of the equity capital and borrowings of an entity, typically reported in the cash flow statement.

Cash Basis

An accounting method where revenues are recognized when cash is received, and expenses are recognized when cash is paid.