EXERCISE 21-21 Revised AD Rauch Inc. leases a piece of equipment to Donahue Corp on 1 lease agreement called for rental payments of $4,892 at the beginning of each year of the 4-year lease The equipment has an purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of /1/20 ofe of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a though this amount is not guaranteed. Rauch set the Reconomie useful life residual value of $8,250 at the end of the lease.term, lease payments with the d nature The lease tem s only 67% (4-6) ofthe economie life of the act, there is no bargain purhase. ownership not transfer, and the asset is not specialized. The calculation fr te 90% test shows the present value of lease is below, 90% ($18.2 14-S25-000-73% $4,892 3.72325 Annual rental payment PV of annuity due of 1 for n-4, i-5% ev te u fer AD $18,214 PV of periodic rental payments (What happened to the residual value???myot quah Therefore, the lease is ain are met netiechi for, the eas ia lease for botdh Rauch and Donashuc, as none of the classfication tests DONAHUE CORPORATION (Lessee) Lease Amortization Schedule Interest (5%) on Liability of Lease Lease Liability Date Annual Payment Liability $4,892 4.892 4,892 4,892 $4.892 4,226 4,437 4.659 $18,214 13.322 9,09 455 233 1/1/20 Why is lease liability $18,214? ra Lease Expense Schedule Amortization of ROU Asset (A-B) Interest (5%) on Lease Lease Expense Date (Straight-Line) Total (d) S for 2017 Initial direct costs do not affect the value of the lease liability, but they do change the value of the right-of. use asset. You need to revise the Lease Expense Schedule accordingly. Lease Lease Expense Interest (5%) on Lease Straight-Line)Liability Amortization of ROU Asset A-B Date Total Right-of-Use Asset JE's for Year of 2018