Question

In: Accounting

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can...

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.

Solutions

Expert Solution

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
($3,000 × 7.23028)

21691

Add:

Present value of the BPO price
($6,000 × 0.78941*)

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
Interest

Decrease in
Balance

Outstanding
Balance

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


Related Solutions

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can...
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 $6,000 beginning September 30, 2021, the beginning...
Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can...
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 on September 30, 2018, the beginning of the lease, and each quarter (December 31,...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10%...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2021, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $936,492. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10%...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $889,667. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 20%...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 20% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $1,051,830. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10%...
Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $936,492. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through...
Pharoah Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of...
Pharoah Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $93,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Pharoah expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals...
Oriole Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of...
Oriole Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $87,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Oriole expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals...
Crane Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of...
Crane Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $96,500. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Crane expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals...
Sunland Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of...
Sunland Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $88,500. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Sunland expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT