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, 2016, the company leased a delivery truck to a local florist, Anything Grows.

The Lease agreement specified quarterly payments of $3000 beginning September 30, 2016, the inception of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2019 (three-year lease term). The florist had the option to purchase the truck on September 29, 2018, for $6000 when it was expected to have a residual value of $10,000. The estimated useful life of the truck is four years. Mid South paid $25,000 for the truck. Both companies use straight-line depreciation. Anything Grows' incremental interest rate is 12%.

Hint: A lease term ends for accounting purposes when an option becomes execisable if it's expected to be exercised (i.e., a BPO)

Required:

1. Calculate the amount of dealer's profit that Mid-South would recognize in this sales-type lease.

2. Prepare the appropriate entries for Anything Grows and Mid South on September 30, 2016.

3. Prepare an amortization schedule 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, 2016.

5. Prepare the appropriate entries for Anything Grows and Mid South Auto Leasing on September 29, 2018, assuming the bargain purchase option was exercised on that date.