Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-08

RHONE-METRO INDUSTRIESAnnual Lease Payments

Requirement 1: Lessor's Calculation of Lease PaymentsAmount to be recovered (fair value) $ 365,760 Less: Present value of the guaranteed residual value (17,075)Amount to be recovered through periodic lease payments $ 348,685 Lease payment at the beginning of each of four years $ 100,000

Correct!

Requirement 2: Present Value of Minimum Lease PaymentsPresent value of periodic Lease payments $ 348,685 Plus: Present value of the lessee-guaranteed residual value 17,075 Present value of minimum lease payments $ 365,760

Correct!(a) By Western Soya Co. (the lessee)Since at least one criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments asa leased asset and a lease liability.

(b) By Rhone-Metro (the lessor)Since the fair value equals the lessor's carrying value, there is no dealer'sprofit, making this a direct financing lease.

Requirement 3: Journal entries on December 31, 2011

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Leased equipment 365,760 Lease payable 365,760 «- Correct!

Lease payable 100,000 Cash 100,000 «- Correct!

Rhone-Metro (Lessor)Lease receivable 365,760 Inventory of equipment 365,760 «- Correct!

Cash 100,000 Lease receivable 100,000 «- Correct!

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-08

Requirement 4:

Lease Amortization Schedule

EffectiveDec. Interest Decrease Outstanding31 Payments 10% in Balance Balance

2011 365,760 2011 100,000 100,000 265,760 2012 100,000 26,576 73,424 192,336 2013 100,000 19,234 80,766 111,570 2014 100,000 11,157 88,843 22,727 2015 25,000 2,273 22,727 -

425,000 59,240 365,760 Correct! Correct! Correct!

Requirement 5: Journal entries on December 31, 2012

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Interest expense 26,576 Lease payable 73,424 Cash 100,000 «- Correct!

Depreciation expense 85,190 Accumulated depreciation 85,190 «- Correct!

Rhone-Metro (Lessor)Cash 100,000 «- Correct! Lease receivable 73,424 Interest revenue 26,576

Requirement 6: Journal entries on December 31, 2015

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Depreciation expense 85,190 Accumulated depreciation 85,190 «- Correct!

Interest expense 2,273 Lease payable 22,727

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-08

Accumulated depreciation 340,760 Loss on residual value guarantee 23,500 Leased equipment 365,760 Cash 23,500 «- Correct!

Rhone-Metro (Lessor)Inventory of equipment 1,500 Cash 23,500 Lease receivable 22,727 Interest revenue 2,273 «- Correct!

Given Data P15-08:

RHONE-METRO INDUSTRIES

Lease length 4 yearsEquipment cost $ 365,760 Expected useful life 6 yearsLessee-guaranteed residual value $ 25,000 Lease payments $ 100,000 Incremental borrowing rate 12%Implicit interest rate 10%

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-09

RHONE-METRO INDUSTRIESAnnual Rental Payments

Requirement 1: Lessor's Calculation of Rental PaymentsAmount to be recovered (fair value) $ 365,760 Less: Present value of the unguaranteed residual value (17,075)Amount to be recovered through periodic rental payments $ 348,685 Rental payment at the beginning of each of four years $ 100,000 Executory costs 4,000 Rental payments including executory costs $ 104,000

Correct!

Requirement 2: Present Value of Minimum Lease PaymentsPresent value of periodic rental payments $ 348,685

Correct!

(a) By Western Soya Co. (the lessee)Since at least one criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments asa leased asset and a lease liability.

(b) By Rhone-Metro (the lessor)Since the fair value exceeds the lessor's carrying value, the equipment is being "sold" at a profit, making this a sales-type lease.

Fair value $ 365,760 (300,000)

Dealer's profit $ 65,760 Correct!

Requirement 3: Journal entries on December 31, 2011

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Leased equipment 348,685 Lease payable 348,685 «- Correct!

Lease payable 100,000 Prepaid operating expense 4,000 Cash 104,000 «- Correct!

minus: Carrying value

Rhone-Metro (Lessor)Lease receivable 365,760 Cost of goods sold 282,925 Sales revenue 348,685 Inventory of equipment 300,000 «- Correct!

Cash 104,000 «- Correct! Payable 4,000 Lease receivable 100,000

Requirement 4:

Lease Amortization Schedule

EffectiveDec. Interest Decrease Outstanding31 Payments 10% in Balance Balance

2011 348,685 2011 100,000 100,000 248,685 2012 100,000 24,869 75,131 173,554 2013 100,000 17,355 82,645 90,909 2014 100,000 9,091 90,909 -

400,000 51,315 348,685 Correct! Correct! Correct!

Lessor Amortization Schedule

EffectiveDec. Interest Decrease Outstanding31 Payments 10% in Balance Balance

2011 365,760 2011 100,000 100,000 265,760 2012 100,000 26,576 73,424 192,336 2013 100,000 19,234 80,766 111,570 2014 100,000 11,157 88,843 22,727 2015 25,000 2,273 22,727 -

425,000 59,240 365,760 Correct! Correct! Correct!

Requirement 5: Journal entries on December 31, 2012

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Depreciation expense 87,171 Accumulated depreciation 87,171 «- Correct!

Operating expense 4,000 Prepaid operating expense 4,000 «- Correct!

Interest expense 24,869 Lease payable 75,131 Prepaid operating expense 4,000 Cash 104,000 «- Correct!

Rhone-Metro (Lessor)Cash 104,000 «- Correct! Payable 4,000 Lease receivable 73,424 Interest revenue 26,576

Requirement 6: Journal entries on December 31, 2012

General Journal

Account Debit CreditWestern Soya Co. (Lessee)Operating expense 4,000 Prepaid operating expense 4,000 «- Correct!

Depreciation expense 87,171 Accumulated depreciation 87,171 «- Correct!

Accumulated depreciation 348,685 Leased equipment 348,685 «- Correct!

Rhone-Metro (Lessor)Inventory of equipment 1,500 Loss on leased assets 23,500 Lease receivable 22,727 Interest revenue 2,273 «- Correct!

Given Data P15-09:

RHONE-METRO INDUSTRIES

Lease length 4 yearsEquipment cost $ 300,000 Expected useful life 6 yearsNormal sales price $ 365,760 Expected residual value (not guaranteed) $ 25,000 Lease payments $ 104,000 Executory costs (included above) $ 4,000 Incremental borrowing rate 12%Implicit interest rate 10%

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-15

Requirement 1:MID-SOUTH AUTO LEASING

Dealer's Profit

Present value of quarterly lease payments $ 21,691 Plus: Present value of the BPO price 4,736 Present value of minimum lease payments $ 26,427 Truck's cost (25,000)Dealer's profit $ 1,427

Correct!Lessor's Calculation of Quarterly PaymentsAmount to be recovered (fair value) $ 26,427 Less: Present value of the BPO price (4,736)Amount to be recovered through quarterly lease payments $ 21,691 Lease payment at the beginning of each of the next 8 quarters $ 3,000

Correct!

Requirement 2 Journal entries on September 30, 2011

General Journal

Account Debit CreditAnything Grows (Lessee)Leased equipment 26,427 Lease payable 26,427 «- Correct!

Lease payable 3,000 Cash 3,000 «- Correct!

Mid-South Auto Leasing (Lessor)Lease receivable 26,427 Cost of goods sold 25,000 Sales revenue 26,427 Inventory of equipment 25,000 «- Correct!

Cash 3,000 Lease receivable 3,000 «- Correct!

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-15

Requirement 3:

Lease Amortization Schedule

EffectiveInterest Decrease Outstanding

Date Payments 3% in Balance Balance9/30/2011 26,427 9/30/2011 3,000 3,000 23,427

12/31/2011 3,000 703 2,297 21,130 3/31/2012 3,000 634 2,366 18,764 6/30/2012 3,000 563 2,437 16,327 9/30/2012 3,000 490 2,510 13,817

12/31/2012 3,000 415 2,585 11,232 3/31/2013 3,000 337 2,663 8,569 6/30/2013 3,000 257 2,743 5,826 9/29/2013 6,000 174 5,826 0

30,000 3,573 26,427 Correct! Correct! Correct!

Requirement 4: Journal entries on December 31, 2011

General Journal

Account Debit CreditAnything Grows (Lessee)Depreciation expense 1,652 Accumulated depreciation 1,652 «- Correct!

Interest expense 703 Lease payable 2,297 Cash 3,000 «- Correct!

Mid-South Auto Leasing (Lessor)Cash 3,000 «- Correct! Lease receivable 2,297 Interest revenue 703

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-15

Requirement 5: Journal entries on September 29, 2013

General Journal

Account Debit CreditAnything Grows (Lessee)Depreciation expense 4,955 Accumulated depreciation 4,955 «- Correct!

Interest expense 174 Lease payable 5,826 Cash 6,000 «- Correct!

Mid-South Auto Leasing (Lessor)Cash 6,000 «- Correct! Lease receivable 5,826 Interest revenue 174

Given Data P15-15:

MID-SOUTH AUTO LEASING

Quarterly payments $ 3,000 Lease term 3 yearsTruck purchase price at end of lease $ 6,000 Residual value $ 10,000 Estimated useful life 4 yearsQuarterly interest rate 3%Approximate annual percentage rate 12%Original truck purchase price $ 25,000

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-18

Requirement 1:1(a) By Bidwell Leasing (the lessor)Since at least one of the classification criterion and both additionallessor conditions are met, this is a capital lease to the lessor.Since the fair value is the lessor's cost, there is no dealer's profit, makingthis a direct financing lease.

1(b) By Red Baron Flying Club (the lessee)Since at least one criterion is met, this is a capital lease to the lessee.Red Baron records the present value of minimum lease payments as aleased asset and a lease liability.

Requirement 2: Journal entries on December 31, 2011

General Journal

Account Debit CreditRed Baron Flying Club (Lessee)Leased equipment 645,526 Lease payable 645,526 «- Correct!

Lease payable 110,000 Cash 110,000 «- Correct!

Bidwell Leasing (Lessor)Lease receivable 645,526 Inventory of equipment 645,526 «- Correct!

Lease receivable 18,099 Cash 18,099 «- Correct!

Cash 110,000 Lease receivable 110,000 «- Correct!

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-18

Requirement 3:

RED BARON FLYING CLUBLease Amortization Schedule

EffectiveDec. Interest Decrease Outstanding31 Payments 10% in Balance Balance

645,526 2011 110,000 110,000 535,526 2011 110,000 53,553 56,447 479,079 1012 110,000 47,908 62,092 416,987 2013 110,000 41,699 68,301 348,686 2014 110,000 34,869 75,131 273,555 2015 110,000 27,356 82,644 190,911 2016 110,000 19,089 90,911 100,000 2017 110,000 10,000 100,000 -

880,000 234,474 645,526 Correct! Correct! Correct!

Requirement 4: Effective interest rate for Bidwell Leasing

Amount to be recovered (fair market value) $ 645,526 Costs to complete lease transaction 18,099 Net investment $ 663,625

Correct!Rent payment at the beginning of each of the next 8 years $ 110,000 Present value table value (computed) 6.03296

New effective rate (lookup from present value table) 9%Correct!

Requirement 5:BIDWELL LEASING

Lease Amortization Schedule

EffectiveDec. Interest Decrease Outstanding31 Payments 9% in Balance Balance

663,625 2011 110,000 110,000 553,625 2011 110,000 49,826 60,174 493,451 1012 110,000 44,411 65,589 427,862 2013 110,000 38,508 71,492 356,370 2014 110,000 32,073 77,927 278,443 2015 110,000 25,060 84,940 193,503 2016 110,000 17,415 92,585 100,918 2017 110,000 9,082 100,918 -

880,000 216,375 663,625

Student Name: InstructorClass: McGraw-Hill/Irwin

Problem 15-18

Correct! Correct! Correct!

Requirement 6: Journal entries on December 31, 2011

General Journal

Account Debit CreditRed Baron Flying Club (Lessee)Interest expense 53,553 Lease payable 56,447 Cash 110,000 «- Correct!

Depreciation expense 80,691 Accumulated depreciation 80,691 «- Correct!

Bidwell Leasing (Lessor)Cash 110,000 «- Correct!Lease receivable 60,174 Interest revenue 49,826

Requirement 7: Journal entries on December 31, 2015

General Journal

Account Debit CreditRed Baron Flying Club (Lessee)Interest expense 10,000 Lease payable 100,000 Cash 110,000 «- Correct!

Depreciation expense 80,691 Accumulated depreciation 80,691 «- Correct!

Bidwell Leasing (Lessor)Cash 110,000 «- Correct!Lease receivable 100,918 Interest revenue 9,082

Given Data P15-18:

BIDWELL LEASING

Purchase at fair value $ 645,526 Term of lease 8 yearsAnnual payments $ 110,000 Implicit interest rate 10%Estimated useful life 8 yearsIncremental borrowing rate 11%Cost of transaction $ 18,099