Bidwell Leasing purchased a single-engine plane for its fair value of $645,526 and leased it to Red Baron Flying Club on January 1, 2011.
| Terms of the lease agreement and related facts were: |
| a. |
Eight annual payments of $110,000 beginning January 1, 2011, the inception of the lease, and at each December 31 through 2017. Bidwell |
| Amount to be recovered (fair market value) | $ | 645,526 | |
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Lease payments at the beginning of each of the next eight years: ($645,526 Af路 5.86842*) |
$ | 110,000 | |
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| *Present value of an annuity due of $1: n = 8, i = 10%. |
| b. | Red Baron’s incremental borrowing rate is 11%. |
| c. |
Costs of negotiating and consummating the completed lease transaction incurred by Bidwell Leasing were $18,099. |
| d. |
Collectibility of the lease payments by Bidwell Leasing is reasonably predictable and there are no costs to the lessor that are yet to be |
| Required: |
| (1) |
How should this lease be classified (a) by Bidwell Leasing (the lessor) and (b) by Red Baron (the lessee)? |
| (a) |
Since at least one (two in this case) classification criterion and both additional lessor conditions are met, this is a (Click to select)direct financing leasecapital lease to the lessor (Bidwell Leasing). Since the fair value is the lessor’s cost, there is no dealer’s profit, making this a (Click to select)capital leasedirect financing lease. |
| (b) |
Since at least one (two in this case) criterion is met, this is a (Click to select)capital leasedirect financing lease to the lessee. Red Baron records the present value of minimum lease payments as a leased asset and a lease liability. |
| (2) |
Prepare the appropriate entries for both Red Baron Flying Club and Bidwell Leasing on January 1, 2011. (Round “PV Factor” |
| Date | General Journal | Debit | Credit |
| Jan 1, 2011: | |||
| Red Baron Flying Club (Lessee) | |||
| (Click to select)Selling expenseInterest expenseLeased equipmentCost of goods soldSales revenueAccounts payableCashInventory of equipment | |||
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(Click to select)Sales revenueUnearned interest revenueLease payableCost of goods soldInterest revenueSelling expenseLeased equipmentLease receivable |
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| (Click to select)Lease receivableCost of goods soldSales revenueCashInventory of equipmentUnearned interest revenueInterest revenueLease payable | |||
| (Click to select)Lease expenseCashLease receivableInventory of equipmentSales revenueSelling expenseUnearned interest revenueCost of goods sold | |||
| Bidwell Leasing (Lessor) | |||
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(Click to select)Inventory of equipmentAccounts payableAccumulated depreciationLease receivableDepreciation expenseLeased equipmentAccounts receivableLease payable |
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(Click to select)Accumulated depreciationLease payableInterest expenseAccounts receivableLeased equipmentDepreciation expenseInventory of equipmentAccounts payable |
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(Click to select)Interest expenseLease payableInventory of equipmentLeased equipmentAccounts payableAccounts receivableLease receivableAccumulated depreciation |
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| (Click to select)Leased equipmentLease payableAccounts payableAccumulated depreciationAccounts receivableDepreciation expenseCashInterest expense | |||
| (Click to select)CashInventory of equipmentLease expenseLeased equipmentSelling expenseCost of goods soldSales revenueUnearned interest revenue | |||
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(Click to select)Lease receivableDepreciation expenseInterest expenseLeased equipmentSelling expenseLease payableAccounts payableAccumulated depreciation |
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| (3) |
Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. (Leave no cells blank – be certain to enter “0” wherever required. Round your answers to the nearest dollar amount. Omit the “$” sign |
| Effective | Decrease in | Outstanding | ||
| Payments | Interest | Balance | Balance | |
| 1/1/11 | ||||
| 12/31/11 | ||||
| 12/31/12 | ||||
| 12/31/13 | ||||
| 12/31/14 | ||||
| 12/31/15 | ||||
| 12/31/16 | ||||
| 12/31/17 | ||||
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| (4) |
Determine the effective rate of interest for Bidwell Leasing for the purpose of recognizing interest revenue over the lease term. (Omit the “%” sign in your response.) |
| Effective rate of interest | % |
| (5) |
Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Bidwell Leasing. (Leave no cells blank – be certain to enter “0” wherever required. Round your answers to the nearest dollar amount. Omit the “$” sign |
| Effective | Decrease in | Outstanding | ||
| Payments | Interest | Balance | Balance | |
| 1/1/11 | ||||
| 12/31/11 | ||||
| 12/31/12 | ||||
| 12/31/13 | ||||
| 12/31/14 | ||||
| 12/31/15 | ||||
| 12/31/16 | ||||
| 12/31/17 | ||||
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| (6) |
Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2011 (the second lease payment). Both companies use |
| Date | General Journal | Debit | Credit |
| Dec 31, 2011: | |||
| Red Baron Flying Club (Lessee) | |||
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(Click to select)Lease payableLeased equipment Accumulated depreciationInventory of equipment CashAccounts payableAccounts receivableInterest expense |
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(Click to select)Accounts payableInventory of equipment Interest expenseLease payableAccounts receivableLeased equipment CashAccumulated depreciation |
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| (Click to select)Interest expenseDepreciation expenseLease payableCashAccounts receivableAccounts payableLease receivableInterest revenue | |||
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(Click to select)Lease receivableInventory of equipmentInterest expenseCashDepreciation expenseLease payableAccounts payableAccumulated depreciation |
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(Click to select)Lease payableLease receivableInterest expenseAccounts receivableInventory of equipmentAccumulated depreciationAccounts payableDepreciation expense |
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| Bidwell Leasing (Lessor) | |||
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(Click to select)Accounts receivableAccounts payableLease payableInterest expenseCashLeased equipmentAccumulated depreciation – buildingLease receivable |
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| (Click to select)Lease payableAccounts payableAccumulated depreciationLease receivableLeased equipment Depreciation expenseInterest revenueCash | |||
| (Click to select)Accounts payableLease payableDepreciation expenseCashAccumulated depreciationInterest revenueLease receivableLeased equipment | |||
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| (7) |
Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2017 (the final lease payment). Both companies use |
| Date | General Journal | Debit | Credit |
| Dec 31, 2011: | |||
| Red Baron Flying Club (Lessee) | |||
| (Click to select)Accounts receivableDepreciation expenseLease payableAccounts payableLeased equipmentCashInterest revenueInterest expense | |||
| (Click to select)Accounts receivableLease payableAccounts payableLeased equipmentInterest expenseInterest revenueCashDepreciation expense | |||
| (Click to select)Accounts receivableLease payableAccumulated depreciationAccounts payableInterest expenseLease receivableCashDepreciation expense | |||
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(Click to select)Depreciation expenseAccumulated depreciationLease payableLease receivableAccounts receivableCashInterest expenseAccounts payableInterest revenue |
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| (Click to select)Accumulated depreciationAccounts payableLease payableCashAccounts receivableInterest expenseDepreciation expenseLease receivable | |||
| Bidwell Leasing (Lessor) | |||
| (Click to select)CashAccounts payableLeased equipmentInterest expenseLease payableInterest revenueAccounts receivableLease receivable | |||
| (Click to select)Accounts receivableDepreciation expenseInterest revenueAccounts payableLease receivableLease payableCashAccumulated depreciation | |||
| (Click to select)Accounts receivableAccumulated depreciationAccounts payableLease payableDepreciation expenseCashLease receivableInterest revenue | |||
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