Question

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.) Required: 1. Calculate the amount of selling profit that Mid-South would recognize in this sales-type lease. (Be careful to note that, although payments occur on the last calendar day of each quarter, since the first payment was at the beginning of the lease, payments represent an annuity due.) 2. Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2021. 3. Prepare an amortization schedule(s) describing the pattern of interest expense for Anything Grows and interest revenue for Mid- South Auto Leasing over the lease term. 4. Prepare the appropriate entries for Anything Grows and Mid-South Auto Leasing on December 31, 2021. 5. Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2023, assuming the purchase option was exercised on that date. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5

Answer 1

Quarterly Rate of Interest = 12%/4	3.00%
Period	8	quarters
1)
Present value of Quaterly lease payments = $3500 x PVAD(3%,8) = $4000 x 7.23028	$  25,307.80
Add: Present value of the BPO price ($7,000 x PV(3% ,8) = $8000 x .78941	$    5,525.87
Present value of minimum lease payments	$  30,833.67
Less:  Selling Cost of Truck	$ (21,000.00)
Dealer's Profit	$    9,833.67
2)
Journal Entries for Anythings Grow on Sept.30 2021	Debit	Credit
Leased Equipment	30833.67
LeasePayable (Present value of minimum lease payments)		30833.67
Lease Payable	3500
Cash (Quarterly lease Payment)		3500
Journal entries for Mid-south
Lease Receivables	30833.67
Cost of Good Sold (lessor's cost)	21000
Sales Revenue		30833.67
Equipment		21000
Cash	3500
Lease Receivables		3500
3)
Amortization table
The amortisation schedule for Lessor and Lesse will be same as they are using same discount rate
Period	Payment	Interest = 3% x Outstanding Balance	Decrease in Balance	Outstanding Balance
Sep 30 2021				$30,833.67
Sep 30 2021	$    3,500.00		$  3,500.00	$27,333.67
Dec 31 2021	$    3,500.00	$     820.01	$  2,679.99	$24,653.68
Mar 31 2022	$    3,500.00	$     739.61	$  2,760.39	$21,893.29
June 30 2022	$    3,500.00	$     656.80	$  2,843.20	$19,050.09
Sep 30 2022	$    3,500.00	$     571.50	$  2,928.50	$16,121.59
Dec 31 2022	$    3,500.00	$     483.65	$  3,016.35	$13,105.24
Mar 31 2023	$    3,500.00	$     393.16	$  3,106.84	$  9,998.40
June 30 2023	$    3,500.00	$     299.95	$  3,200.05	$  6,798.35
Sep 30 2023	$    7,000.00	$     203.95	$  6,798.35	$        (0.00)
4)
31-Dec-16
Anything Grows (Lessee)
Depreciation expense ([$30833.67 ÷ 4 years*] x 1/4 year)	$    1,927.10
Accumulated depreciation		$  1,927.10
Interest expense (3% x [$30833.67 – 3,500]: from schedule)	$       820.01
Lease payable (difference: from schedule)	$    2,679.99
Cash (lease payment)		$  3,500.00
Mid-South Auto Leasing (Lessor)
Cash (lease payment)	$    3,500.00
Lease receivable (difference : from schedule)		$  2,679.99
Interest revenue (3% x [$30833.67 – 3,500]		$     820.01
5)
29-Sep-23
Anything Grows (Lessee)
Depreciation expense ([$30833.67 ÷ 4 years*] x 3/4 year)	$    5,781.31
Accumulated depreciation		$  5,781.31
Interest expense (3% x $6798.35 : from schedule)	$       203.95
Lease payable (difference: from schedule)	$    6,796.05
Cash (BPO price)		$  7,000.00
Mid-South Auto Leasing (Lessor)
Cash (BPO price)	$    7,000.00
Lease receivable (difference: from schedule)		$  6,796.05		\
Interest revenue (3% x $6798.35): from schedule)		$     203.95

Answer 2

Everything above is correct except amortization.

Amortization for 4 and 5 should be:

Amortization expense

    Right of use asset