P 15-1 Operating lease; scheduled rent increases LO4 On January 1, 2011, Sweetwater Furniture Company leased office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year. The payments are $10,000 the first year and increase by $500 per year. Benefits expected from using the office space are expected to remain constant over the lease term. Required: Record Sweetwater's rent payment at December 31, 2015 (the fifth rent payment) and December 31, 2025 (the 15th rent payment). P 15-4 Capital lease LO5 At the beginning of 2011, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year. Required: 1. What is the effective rate of interest implicit in the agreement? 2. Prepare the lessee's journal entry at the inception of the lease. 3. Prepare the journal entry to record the first lease payment at December 31, 2011. 4. Prepare the journal entry to record the second lease payment at December 31, 2012. 5. Suppose the fair value of the machine and the lessor's implicit rate were unknown at the time of the lease, but that the lessee's incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee's entry at the inception of the lease. (Note: You may wish to compare your solution to Problem 15-4 with that of Problem 14-12, which deals with a parallel situation in which the machine was acquired with an installment note.) P 15-18 Initial direct costs; direct financing lease LO3 LO5 LO9 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 Leasing's implicit interest rate was 10%. The estimated useful life of the plane is eight years. Payments were calculated as follows: 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 incurred. Required: 1. How should this lease be classified (a) by Bidwell Leasing (the lessor) and (b) by Red Baron (the lessee)? 2. Prepare the appropriate entries for both Red Baron Flying Club and Bidwell Leasing on January 1, 2011. 3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. 4. Determine the effective rate of interest for Bidwell Leasing for the purpose of recognizing interest revenue over the lease term. 5. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Bidwell Leasing. 6. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2011 (the second lease payment). Both companies use straight-line depreciation. 7. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2017 (the final lease payment).

Problem 15-1 December 31, 2013 Rent expense Deferred rent expense payable Cash December 31, 2023 Rent expense Defered rent expense payable Cash Problem 15-4 1. Effective rate of interest implicity in the agreement Present value / lease payment = present value table amount 2. Inception of the lease Leased asset Leases payable 3. December 31, 2009 Interest expense Leases payable Cash 4. Decmeber 31, 2010 Interest expense Lease payable Cash 5. Inception of the lease Rental payment X PVOA = PV Leased asset Lease payable Student Name: Class: Problem 15-18 Requirement 1: 1(a) By Bidwell Leasing (the lessor) 1(b) By Red Baron Flying Club (the lessee) Requirement 2: Journal entries on December 31, 2009 General Journal Account Red Baron Flying Club (Lessee) Leased equipment Lease payable Debit Credit Lease payable Cash Bidwell Leasing (Lessor) Lease receivable Inventory of equipment Lease receivable Cash Cash Lease receivable Requirement 3: RED BARON FLYING CLUB Lease Amortization Schedule Dec. 31 Payments Effective Interest Decrease Outstanding 10% in Balance Balance 2009 2009 2010 2011 2012 2013 2014 20115 Requirement 4: Effective interest rate for Bidwell Leasing Amount to be recovered (fair market value) Costs to complete lease transaction Net investment Rent payment at the beginning of each of the next 8 years Present value table value (computed) New effective rate (lookup from present value table) Requirement 5: BIDWELL LEASING Lease Amortization Schedule Dec. 31 Payments Effective Interest Decrease Outstanding 0% in Balance Balance 2009 2009 2010 2011 2012 2013 2014 20115 Requirement 6: Journal entries on December 31, 2009 General Journal Account Red Baron Flying Club (Lessee) Interest expense Lease payable Cash Debit Credit Depreciation expense Accumulated depreciation Bidwell Leasing (Lessor) Cash Lease receivable Interest revenue Requirement 7: Journal entries on December 31, 2015 General Journal Account Red Baron Flying Club (Lessee) Interest expense Lease payable Cash Depreciation expense Accumulated depreciation Bidwell Leasing (Lessor) Cash Lease receivable Interest revenue Debit Credit Given Data P15-18: BIDWELL LEASING Purchase at fair market value Annual payments Implicit interest rate Estimated useful life Incremental borrowing rate Cost of transaction $645,526 $110,000 10% 8 years 11% $18,099