# Chapter 21

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CHAPTER 21 Accounting for Leases SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 21-1 The lease does not meet the transfer of ownership test, the bargain purchase test, or the economic life test [(5 years ÷ 8 years) < 75%]. However, it does pass the recovery of investment test. The present value of the minimum lease payments (\$31,000 X 4.16986 = \$129,266) is greater than 90% of the FV of the asset (90% X \$138,000 = \$124,200). Therefore, Callaway should classify the lease as a capital lease. BRIEF EXERCISE 21-2 Leased Equipment 150,000 Lease Liability 150,000 Lease Liability 43,019 Cash 43,019 BRIEF EXERCISE 21-3 Interest Expense 29,530 Interest Payable [(\$300,000 – \$53,920) X 12%] 29,530 Depreciation…show more content…
Costs | |Reduction of Lease | | | | |Interest (12%) on Liability |Liability | | |Date | | | |Lease Liability | |1/1/12 | | | |\$550,000 | |1/1/12 |\$86,912 |\$ 0 |\$86,912 |463,088 | |1/1/13 |86,912 |55,571 |31,341 |431,747 | |1/1/14 |86,912 |51,810 |35,102 |396,645 | EXERCISE 21-4 (20–25 minutes) Computation of annual payments Cost (fair value) of leased asset to lessor \$240,000.00 Less: Present value of salvage value (residual value in this case) \$16,000 X .82645 (Present value of 1 at 10% for 2 periods) 13,223.20 Amount to be recovered through lease payments \$226,776.80 Two periodic lease payments \$226,776.80 ÷ 1.73554* \$130,666.42 *Present value of an ordinary annuity of