Question

Bidwell Leasing purchased a single-engine plane for its fair value of $645,526 and leased it to Red Baron Flying Club on January 1, 2021.(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.)

Terms of the lease agreement and related facts were

1. Eight annual payments of $110,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 through 2027. Red Baron knows that Bidwell Leasing’s implicit interest rate was 10%. The estimated useful life of the plane is eight years. Payments were calculated as follows:

Amount to be recovered (fair value)	$	645,526
Lease payments at the beginning of each of the next eight years: ($645,526 ÷ 5.86842*)	$	110,000

*Present value of an annuity due of $1: n = 8, i = 10%.

2. Red Baron's incremental borrowing rate is 11%.
3. Incremental costs of negotiating and consummating the completed lease transaction incurred by Bidwell Leasing were $18,099.

Required:

1. How should this lease be classified (a) by Bidwell Leasing (the lessor) and (b) by Red Baron (the lessee)?
2. Prepare the appropriate entries for both Red Baron Flying Club and Bidwell Leasing on January 1, 2021.
3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club.
4. Determine the effective rate of interest for Bidwell Leasing for the purpose of recognizing interest revenue over the lease term.
5. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Bidwell Leasing.
6. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2021 (the second lease payment). Both companies use straight-line depreciation.
7. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2027 (the final lease payment).

Answer 1

The interest rate for lessee will be its incremental rate of return as given in the questio and for lessor it will be 10%.
Ans uxr : The type or lease ů known as o finance ease because as per the conditions of As it covers more than 50% & the life of the acect asset.

Journal Entry in the books of lessor Jan, 21 (9) teas. Lessee Ale Dr. 645,526 - To Asset I plane ALC 645,526 I (Being asset given on lease) (b) Bank 110,000 ALC To Lease rental Dr. Routal ALL received) 110,000 Being (c) Lease 110,000 Rental ml Dr. To Lessee Alc Lease rental apportioned Il Reing

31 Dec, 2021 (a) Bank ALL Dro 110.000 To Lease Rental All 110,000 Being rental recived) (b) Lease sental ALL Dr. 110,000 To finance charge (ne. Interest) 53,553 To hessee All (principal Amount) 56,447 Being hease rental apportioned)

B Calculation of Amount to be recognised as an Asset & Lessor All in the books of lessee (a) Fair value of Asset (including = 645, 526+ 18,099 Direct cost incurred by lessee) = 663 625 (6) Present value of Minimum Lease Payment. year lease Rental Annuity value @11). .110,000 X L - 110,500 1100 o 900g 99099 110,660 0.8116 8 9278 110,000 0.731 110,00 x 6.658 110,600x 72460 0.5.93 110,000x 0.534 65280 110.000* 58810 0:481 52982 Total 628340 MJMT100 80431 ra) or b) whichever is lower se, 628340 ILIP

Bostatement in the year opening showing books of tease apportionment of lease Rental lessee. Interest principal closing charge Redund. Balance @ 110,000 518340 Balance Payenent 57017 4 65357 Jan 21 (628340 110,080 & Dec 21 518340 110,000 Dec 22 (465357 110,000 bec23 4065ub/ 110,000 Dec 24/341266110,000 Dec 25 268805 110, 680 Dec 26 188373 1110.000 Bec 22 99094 1160,000 51189 44720 37539 29568 20721 52983 58811 65280 72461 80432 & 9279 406sub 341266 2688 05 188373 99094 10906 110,000

of In Statement showing -prinupal & interest the books of distribution charge in lessor. year opening Lease prinupal Interest closing Balance payment Amount Changelo Ralance Jan 21 645,526 110,000 1116 000 1535526 56447 Dec 21 5.35526 110,000 479079 Dec 22 479079110,000 6269247908 4.16987 4 (6987 110,000 68301 41699 348686 Dec 24 348686 110,000 7 313234869 273554. 27355 190909 no 25 273554 110,000 8 2 645 90 909 19091 Dec 26190909 110,000 Dec 27 100,000 lí10,000 100000 | 10,000 Dec 23 1ooooo