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

[answerhappygod]

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 $3,050
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 $6,100 when it was expected to
have a residual value of $10,150. 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 $25,420 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).
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.