Chapter 21

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 Expense 37,500 Accumulated Depreciation—Capital Leases ($300,000 X 1/8) 37,500

BRIEF EXERCISE 21-4
Interest Payable [($300,000 – $53,920) X 12%] 29,530
Lease Liability 24,390 Cash 53,920

BRIEF EXERCISE 21-5
Rent Expense 35,000 Cash 35,000

BRIEF EXERCISE 21-6
Lease Receivable (4.99271 X $30,044) 150,000 Equipment 150,000
Cash 30,044 Lease Receivable 30,044

BRIEF EXERCISE 21-7
Interest Receivable 9,596 Interest Revenue [($150,000 – $30,044) X 8%] 9,596

BRIEF EXERCISE 21-8
Cash 15,000 Rent Revenue 15,000
Depreciation Expense 10,000 Accumulated Depreciation—Capital Leases ($80,000 X 1/8) 10,000

BRIEF EXERCISE 21-9
Leased Equipment 202,921* Lease Liability 202,921 *PV of rentals $40,000 X 4.79079 $191,632 [PV of guar. RV $20,000 X .56447 11,289 $202,921
Lease Liability 40,000 Cash 40,000

BRIEF EXERCISE 21-10
Lease Receivable 202,921 Equipment 202,921
Cash 40,000 Lease Receivable 40,000

BRIEF EXERCISE 21-11
Lease Receivable ($40,800 X 4.03735) 164,724 Sales Revenue 164,724
Cost of Goods Sold 110,000 Inventory 110,000
Cash 40,800 Lease Receivable 40,800

*BRIEF