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 $4,500 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 $9,000 when it was expected to have a residual value of $11,500. 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 $35,000 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.

Answer 1

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Answer 1 Quarterly Rate of Interest Period 2% 8 quarters Credit Answer 2 Journal Entries in books of Anything Grow Date Account Titles and Explanation 30-Sep-21 Leased Equipment Lease Payable (To record Present value of minimum lease payments) Debit $ 41,306 $41,306 Lease Payments made at beginning of year Present value of Quaterly lease payments $ 4,500 Add: Present value of the BPO price $ 4,500 $4,500 x PVAD(2%,8) $4,500 x 7.4720 $ 33,624 $9,000 x PV(2%,8) $9,000 x.8535 $ 7,682 $ 41,306 $ 35,000 $ 6,306 Present value of minimum lease payments Less: Selling Cost of Truck Dealers profit 30-Sep-21 Lease Payable Cash (To record Quarterly lease payment) Journal Entries in books of Mid South 30-Sep-21 Lease Receivables Cost of Good Sold (lessor's cost) Sales Revenue Equipment $ 41,306 $ 35,000 $ 41,306 $ 35,000 $ 4,500 30-Sep-21 Cash Lease Receivables $ 4,500 Answer 3 Lease Amortization Table Outstanding Interest @2% Balance B = 2%of Decrease in D = C - Previous Payment Outstanding Balance outstanding Period А balance C = A-B balance Sep 30 2021 $ 41,306 Sep 30 2021 $ 4,500 $ 4,500.00 $ 36,806 Dec 31 2021 $ 4,500 $ 736.11 $3,763.89 $ 33,042 Mar 31 2022 $ 4,500 $ 660.83 $3,839.17 $ 29,202 Jun 30 2022 $ 4,500 $ 584.05 $ 3,915.95 $ 25,286 Sep 30 2022 $ 4,500 $ 505.73 $ 3,994.27 $ 21,292 Dec 31 2022 $ 4,500 $ 425.84 $ 4,074.16 $ 17,218 Mar 31 2023 $ 4,500 $ 344.36 $4,155.64 $ 13,062 Jun 30 2023 $ 4,500 $ 261.25 $ 4,238.75 $ 8,824 Sep 30 2023 $ 9,000 $ 176.47 $ 8,823.53 $ 0 $ 45,000 $ 41,306