Question

Bidwell Leasing purchased a single-engine plane for $470,000 and leased it to Red Baron Flying Club for its fair value of $828,269 on January 1, 2018. (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:

Eight annual payments of $145,000 beginning January 1, 2018, the inception of the lease, and at each December 31 through 2024. Bidwell Leasing’s implicit interest rate was 11%. The estimated useful life of the plane is eight years. Payments were calculated as follows:

Amount to be recovered (fair value)	$	828,269
Lease payments at the beginning of each of the next eight years: ($470,000 ÷ 5.7122*)	$	145,000

* Present value of an annuity due of $1: n = 8, i = 11%

Red Baron’s incremental borrowing rate is 12%.

Costs of negotiating and consummating the completed lease transaction incurred by Bidwell Leasing were $22,652.

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, 2018. Record the lease for Red Baron Flying Club.Record the lease payment for Red Baron Flying Club. Record the lease for Bidwell Leasing. Record the initial direct costs for Bidwell Leasing. Record the cash received on lease.?
3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club.
4. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2018 (the second lease payment). Both companies use straight-line depreciation. Record the lease payment for Red Baron Flying Club. Record the amortization expense for Red Baron Flying Club. Record the cash received on lease.
5. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2024 (the final lease payment). Record the lease payment for Red Baron Flying Club. Record the amortization expense for Red Baron Flying Club. Record the cash received on lease

How should this lease be classified (a) by Bidwell Leasing (the lessor) and (b) by Red Baron (the lessee)?

	(a) Bidwell (b) Red baron ?

.

Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. (Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.)

	Lease Amortization Schedule Date Payments Effective Interest Decrease in Balance Outstanding Balance 1/1/18 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24

Answer 1

65 2 Cost of Goods sol....Dr $470,000 To Single-engine plane (To record sale of single-engine plane by debiting cost of goods sold by the cost of asset) $470,000 67 68 69 70 3 Cash..Dr $ 145,000 To Lease receivable $145,000 (To record receipt of annual lease payments at the inception of the lease 72 73 74 75 76 4 Selling expense...Dr $ 22,652 To cash (initial direct cost) To record cost of negotiating and consummating the completed lease transaction) $22,652 Notes In sales type lease, initial direct cost is expensed at the inceptiongf the lease, since the main reason for sales-type lease is to sell its product and any expense incurred for selling the product would be expensed out in the same year of sale as selling expenses 78 79 81 82 83 84 85 86 87

Lease Amortization schedule Date Payments Effective Decrease Outstanding Interest in Balance Balance 1-1-18 12-31-2018 12-31-2019 12-31-2020 12-31-2021 12-31-2022 12-31-2023 12-31-2024 145000 145000 145000 145000 145000 145000 145000 145000 75159 67476 58949 49483 38976 27313 14379 145000 69841 77524 86051 95517 106024 117687 130621 828265 683265 613424 535900 449849 354332 248308 130621 0 10 12 13 14 15 16 17 18 19 20 21 Interest rate to be considered for lessee will be lower of implicit rate and incremental borrowing rate In this case, interest rate to be considered-11% The first lease payment is made at the inception of lease and hence no interest in this payment. Calculation of effective interest Date Calculation Amount($) 112-31-2018 |683265*11% 75159 67476 58949 49483 38976 27313 14379 (Adjusted for rounding of other numbers in the schedule) " 24 12-31-2019/ 61 3424*11% 12-31-2020 1535900*11% 12-31-2021 449849*11% 12-31-2022 354332*1196 12-31-2023 248308*11% 12-31-2024 13062 1.11%) 26 27 29 31

Conditional Format Neutral Formatting as Tab U11 Nümber tyles 5 Appropriate entries for both Red Baron Fly (a) Journal Entries in the books of the Red Baron Flying g club and Bidwell Leasing on Decem the lessee on Dedembe ber 31,2024 1 Lease payable... Dr Interest expense (130621.11%) To cash $130,621 $14,379 6. $1 (To record final lease payment and interest expense debited as per am ortisation sched 2 Depreciation Expense... Dr 533 10 To Accumulated depreciation (To record depreciation at the end of the year) Depreciation 828265/8 years 103533 S) 12 13 14 (b) Journal Entries in the books of Bidwell Leasing, the lessor on December a 15 16 17 18 19 20 21 1 Cash...Dr $ 145,000 To Lease receivabl $ 145,000 (To record receipt of final lease payment) 2 Unearned interest revenue...Dr $14,375 To Interest revenue $14,375 " (To record interest income ie. 130625*11%) 23 Notes First lease payment was made at the beginning of the lease and the second lease payment was made at the end of 1st year purchase At the final lease payment, depreciation have been charged for 7 years and 1 year of charging depreciation will be done on 31/12/2025 as the estimated useful life of asset is 8 years which will be done on 31/12/2025 27 31