BE21-1 (L02) Callaway Golf Co. leases telecommunications equipment from Photon Company. Assume the following data for equipment leased from Photon Company. The lease term is 5 years and requires equal rental payments of $31,000 at the beginning of each year. The equipment has a fair value at the commencement of the lease of $150,000, an estimated useful life of 8 years, and a guaranteed residual value at the end of the lease of $15,500. Photon set the annual rental to earn a rate of return of 6%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain purchase option, and is not a specialized asset. How should I calculate Pv of annuity due of 1 for 5 periods at 5%, PV of ordinary annuity of 1 for 5 periods at 5%, and PV of 1 for 5 periods at 5%? When should I use each one of them?

Transfer of ownership test

no

PV of ordinary annuity of 1 for 5 periods at 5%

(1-(1+.05)^-5)/.05

Bargain Purchase Option Test

no

Pv of annuity due of 1 for 5 periods at 5%

Lease Term Test 75% of economic life

63%

no

PV of 1 for 5 periods at 5%

Present Value Test 90% of FMV

87%

130572

no

Alternative Use Test

no

operating lease