Question

Check my work 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 $4,000 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 $8,000 when it was expected to have a residual value of $16,500. 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 $30,000 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. EVAD 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.

Answer 1

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Answer 1 Selling Profit Answer 3 Lease amortizartion table $ 6,716 Present value of Quarterly Lease Payment ($4,000 + PVAD(2%,8)) = $4,000 * 7.4720 Payments Effective Interest Decrease in balance Outstanding balance (A) (B =D *2%) (C = A-B) D = D-C $29,888 Date Add: Present value of option to purchase ($8,000 * PV(2%,8)) = $8,000 * 0.8535 Present value of minimum Lease payment Less : selling cost of truck Gain on sale $6,828 $36,716 $30,000 $6,716 9/30/21 9/30/21 $ 4,000 12/31/21 $ 4,000 $ 3/31/22 $ 4,000 $ 6/30/22 $ 4,000 $ 9/30/22 $ 4,000 $ 12/31/22 $ 4,000 $ 3/31/23 $ 4,000 $ 6/30/23 $ 4,000 $ 9/29/23 $ 8,000 $ $ 40,000 $ Answer 2 Jounal entries in the books of Anythings Grow Date Account Title and Explanation Debit Credit Sep 30,2021 Leased Equipment $36,716 LeasePayable $36,716 (To record beginning of lease) S 654.32 $ 587.41 $ 519.15$ 449.54 $ 378.53 $ 306.10 $ 232.22 $ 156.87 $ 3,284 $ $ 4,000 $ 3,346 $ 3,413 $ 3,481 $ 3,550 $ 3,621 $ 3,694 $ 3,768 $ 7,843 $ 36,716 36,716 32,716 29,370 25,958 22,477 18,926 15,305 11,611 7,843 0 Sep 30,2021 $4,000 Lease payable Cash (To record cash payment) $4,000 Jounal entries in the books of Mid South Auto Leasing Sep 30,2021 Lease receivable $36,716 Cost of goods sold $30,000 Sales revenue $36,716 Equipment $30,000 (To record beginning of lease) Sep 30,2021 $4,000 Cash Lease receivable (To record cash received) $4,000 Answer 4 Jounal entries in the books of Anythings Grow Date Account Title and Explanation Debit Credit Dec 31,2021 Depreciation expense $2,295 Accumulated depreciation $2,295 (To record amortization) Dec 31,2021 $654 $3,346 Interest expense Lease payable Cash (To record cash payment) $4,000 Jounal entries in the books of Mid South Auto Leasing Dec 31,2021 Cash $4,000 Lease receivable $3,346 Interest revenue $654 (To record cash received) Working Depreciation expense Cost of Truck Life Depreciation expense for 1 quarter $36,716 4 years ($36,716/4) * 1/4 $2,295 Answer 5 Jounal entries in the books of Anythings Grow Date Account Title and Explanation Debit Credit Sep 29,2023 Depreciation expense $6,884 Accumulated depreciation $6,884 (To record amortization) Sep 29,2023 $157 $7,843 Interest expense Lease payable Cash (To record cash payment) $8,000 Jounal entries in the books of Mid South Auto Leasing Sep 29,2023 Cash $8,000 Lease receivable $7,843 Interest revenue $157 (To record cash received)