Question

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying and requires an interest rate implicit in the lease that is one percent below alternate methods of financing. On September 30, 2021, the company leased a delivery truck to a local florist, Anything Grows. The fiscal year for both companies ends December 31. The lease agreement specified quarterly payments of $3,500 beginning September 30, 2021, the beginning of the lease, and each quarter December 31, March 31, and June 30) through June 30, 2024 (three-year lease term). The florist had the option to purchase the truck on September 29, 2023, for $7,000 when it was expected to have a residual value of $16,000. The estimated useful life of the truck is four years. Mid-South Auto Leasing's quarterly interest rate for determining payments was 3% (approximately 12% annually). Mid-South paid $21,000 for the truck. Both companies use straight-line depreciation or amortization. Anything Grows' incremental interest rate is 12%. Hint: A lease term ends for accounting purposes when an option becomes exercisable if it's expected to be exercised (i.e., a BPO). (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Answer Page No ③ /(1434108 ☺ Present value of quarterly Lease payments = 3500 X 34*M5) ( 1 * 3500 In=4x2) 3500 X 7. 230282955 = $25306 Present value of BPO price = $7000 x0.4894092343 6:= 8yil 071737) = $5526 Present value of minimum lease payments = 25306 + 5506 : $30832 Truck conf <$21000 Dealers profit - 30832 - 21000 - $9832 ti Dealer's Profit = $9832 y Jewernal entries for Anything arousses the south on Septzcoa) The jownal enties cie as follows

Sept 30, 2021 Sept 30, $30832 Sept 30, 2021 Page No@ I Date Particular Debit I Credit Lease equipment $30832 Lease payable $30832 Lease payable $3500 2021 : cash $3500 Lease Oreceivable cost of goods sold $21000 Sales oreverue $30832 Inventory equipment $ 21000 sept 30, $ 3500 lease creceivable 3500 © Anetization schedule Payments = $3600 Effective interest @ 34. = 3% x Previous balance Dearese in outstanding balance = Payments - ebbechive interest Balance e Previous balance - decrease in out standing balance cash 2021

Payments 30/21 11031137 Date 9/20/21 $ 3500 $3500 313.22 $3500 6130122 $3500 9/30/22 $3500 22131122 $3500 3/31) 23 3500 6130123 $3500 19/29123 $7000 $ 35000 Page No ③ affective interest Decrease in outstan Balance 1.-ding balance 530832 $3500 $27332 $820 $ 2680 $24672 $440 $ 2760 $ 21892 $667 $ 2843 *19049 $ 571 $ 2929 $16120 $484 $ 3016 $ 13104 $393 $3107 $9997 $ 300 $ 3200 $6797 2014 $6796 $0 $ 4168 | $30832 © Journal certaines comme de l 2001 rsepito dec31) Depreciation Depreciation expense = 30832 x C3 months = $1927

Page: No ' Credit Date | dec 31, | 2001 Debit $ 1927 $1927 decl Particular Depreciation expense Accumulated depreciation Interest expense : Lease payable cash ป Lease receivable Interest revenue 820 $2680 2021 $ 3500 $3500 dec 31, 2021 $2680 $ 820 Debit cheat, 2021 © Tournal entry Canto sep 30832 x 2 Depreciation expense = $5481 ( amonths) Date - Particular Gedit Depreciation expense $ 5981 Accumulated depreciation $5781 dec 31, Interest expense $ 204 Lease payable $6796 cash $7000 Cash $7000 hease receivable $ 6796 Interest revenue $ 204 20al dec31, 3021