In: Accounting
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, 2018, the company leased a delivery truck to a local florist, Anything Grows. The lease agreement specified quarterly payments of $3,000 beginning September 30, 2018, the beginning of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2021 (three-year lease term). The florist had the option to purchase the truck on September 29, 2020, for $6,000 when it was expected to have a residual value of $10,000. The estimated useful life of the truck is four years. Mid-South Auto Leasing’s quarterly interest rate for determining payments was 3% (approximately 12% annually). Mid-South paid $25,000 for the truck. Both companies use straight-line depreciation or amortization. Anything Grows’ incremental interest rate is 12%.
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, 2018.
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, 2018.
5. Prepare the appropriate entries for Anything
Grows and Mid-South on September 29, 2020, assuming the purchase
option was exercised on that date.
1.
Calculate the amount of selling profit that Mid-South would recognize in this sales-type lease
Dealer’s profit |
1427 |
Working for the answer
Present value of quarterly lease payments |
21691 |
Add: |
|
Present value of the BPO price |
4736 |
Present value of minimum lease payments |
26427 |
present value of $1: n = 8, i = 3% =7.23028
present value of an annuity due of $1: n = 8, i = 3%=0.78941
Selling price (as calculated above) A |
26427 |
Cost of the truck(as Given) B |
25000 |
Dealer’s profit (a-B ) |
1427 |
_________________________________________________________________
2.
Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2018.
Date |
Description |
Debit $ |
Credit $ |
Sep-30,2018 |
Leased equipment |
26427 |
|
Lease payable |
26427 |
||
Sep-30,2018 |
Lease payable |
3000 |
|
Cash |
3000 |
Date |
Description |
Debit $ |
Credit $ |
Sep-30,2018 |
Lease Receivable |
26427 |
|
Cost of goods sold |
25000 |
||
Sales Revenue |
26427 |
||
Inventory-equipment |
25,000 |
||
Sep-30,2018 |
Cash |
3000 |
|
Lease Receivable |
3000 |
_____________________________________________________________
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.
Lease Amortization Schedule |
||||
Date |
Payment |
Effective |
Decrease in |
Outstanding |
26427 |
||||
9/30/2018 |
3000 |
3000 |
23427 |
|
12/31/2018 |
3000 |
703 |
2297 |
21130 |
3/31/2019 |
3000 |
634 |
2366 |
18764 |
6/30/2019 |
3000 |
563 |
2437 |
16327 |
9/30/2019 |
3000 |
490 |
2510 |
13817 |
12/31/2019 |
3000 |
415 |
2585 |
11232 |
3/31/2020 |
3000 |
337 |
2663 |
8569 |
6/30/2020 |
3000 |
257 |
2743 |
5826 |
9/29/2020 |
6000 |
174 |
5826 |
|
30000 |
3573 |
26427 |
_____________________________________________________________
4. Prepare the appropriate entries for Anything Grows and Mid-South Auto Leasing on December 31, 2018.
Date |
Description |
Debit $ |
Credit $ |
Dec-31,2018 |
Depreciation expense |
1652 |
|
Accumulated Depreciation |
1652 |
||
Dec-31,2018 |
Interest exp |
703 |
|
Lease payable |
2297 |
||
cash |
3000 |
||
Dec-31,2018 |
cash |
3000 |
|
Lease Receivable |
2297 |
||
Interest Revenue |
703 |
___________________________________________
5. Prepare the appropriate entries for Anything Grows and Mid-South
on September 29, 2020, assuming the purchase option was exercised
on that date.
Date |
Description |
Debit $ |
Credit $ |
Dec-31,2018 |
Depreciation expense |
4955 |
|
Accumulated Depreciation |
4955 |
||
Dec-31,2018 |
Interest exp |
174 |
|
Lease payable |
5826 |
||
cash |
6000 |
||
Dec-31,2018 |
cash |
6000 |
|
Lease Receivable |
5826 |
||
Interest Revenue |
174 |