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 $10,500. The estimated useful life of the truck is four years. Mid-South Auto Leasing's quarterly interest rate for determining payments was 2% (approximately 8% annually). Mid-South paid $26,000 for the truck. Both companies use straight-line depreciation or amortization. Anything Grows incremental interest rate is 8%. 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 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.) (Round your intermediate and final answers to nearest whole dollar.) Selling profit Required 1 Required 2 >

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Answer 1

1. Selling Profit = $ 6,126

Calculation:

Present value of quarterly lease payments (3,500 * 7.47199)	26,151.97
Plus: Present value of the BPO price (7,000 * 0.85349)	5,974.43
Present value of minimum lease payments	32,126.40

Present value : n = 8, i = 2%

Payment of option price $7000 is expected to occur when the option become exercisable at end of 8th quarter, so n = 8

So, if we are using excel, we could calculate by = PV(2%,8,3500,0,1) = 26,151.97

Present value of an annuity due : n = 8, i = 2% ,

So, if we are using excel, we could calculate by = PV(2%,8,,7000,0) = 5,974.43

Then, the dealers selling profit will be:

Selling Price	32,126
Truck’s cost	26,000
Selling profit	6,126

2.

Date	General Journal	Debit	Credit
30-Sep-21	Leased equipment	32,126
	Lease payable		32,126
Record the beginning of the lease for Anything Grows
30-Sep-21	Lease payable	$ 3,500
	Cash		$          3,500
Record the cash payment for Anything Grows
30-Sep-21	Lease receivable	32,126
	Cost of goods sold	26,000
	Sales revenue		32,126
	Inventory of equipment		26,000
Record the beginning of the lease of Mid-South Auto Leasing
30-Sep-21	Cash	$ 3,500
	Lease receivable		$          3,500
Record the cash received by Mid-South

3.

Lease Amortization Schedule
	(A)	(B)	( C)	(D)
Date	Payments	Effective Interest (B) = (D) * 2%	Decrease in balance (A - B)	Outstanding Balance (D-C)
9/30/2021				32,126
9/30/2021	3,500		3,500	28,626
12/31/2021	3,500	573	2,927	25,699
3/31/2022	3,500	514	2,986	22,713
6/30/2022	3,500	454	3,046	19,667
9/30/2022	3,500	393	3,107	16,561
12/31/2022	3,500	331	3,169	13,392
3/31/2023	3,500	268	3,232	10,160
6/30/2023	3,500	203	3,297	6,863
9/29/2023	7,000	137	6,863	(0)
	35,000	2,874	32,126

4.

Date	General Journal	Debit	Credit
30-Sep-21	Depreciation expense	2,008
	Accumulated depreciation		2,008
Record the amortization for Anything Grows
30-Sep-21	Interest expense	$ 573
	Lease payable	2,927
	Cash		$ 3,500
Record the cash payment for Anything Grows
30-Sep-21	Cash	3,500
	Lease receivable		2,927
	Interest revenue		573
Record the cash received by Mid-South Auto Leasing

Calculation:

December 31, 2021
Anything Grows (Lessee)
Depreciation expense = ($32,126÷ 4 years*) × 1/4 year) = $2,008
Interest expense = (2% × ($32,126– 3,500) = $573
Mid-South Auto Leasing (Lessor)
Interest revenue = (2% × ($32,126– 3,500) = $573

5.

Date	General Journal	Debit	Credit
30-Sep-23	Depreciation expense	6,024
	Accumulated depreciation		6,024
Record the amortization
30-Sep-23	Interest expense	$          137.25
	Lease payable	6,863
	Cash		$ 7,000
Record the cash payment for Anything Grows
30-Sep-23	Cash	7,000
	Lease receivable		137
	Interest revenue		6,863
Record the cash payment received by Mid-South Auto Leasing

Calculation:

September 29, 2023
Anything Grows (Lessee)
Depreciation expense = ($32,126 ÷ 4 years] × 3/4 year) = $6,024
Interest expense = (2% × $6,863: from the schedule) = $137
Mid-South Auto Leasing (Lessor)
Interest revenue = (2% x $6,863: from the schedule) = $137