P 15-8 Guaranteed residual value; direct financing lease LO3 LO5 LO8 (Note: Problems 8, 9, and 10 are three variations of the same basic situation.) On December 31, 2011, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2015, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and has an expected useful life of six years. Its normal sales price is $365,760. The lessee-guaranteed residual value at December 31, 2015, is $25,000. Equal payments under the lease are $100,000 and are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Rhone-Metro has no material cost uncertainties. Western Soya's incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation. Required: 1. Show how Rhone-Metro calculated the $100,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? Why? 3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2011. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2012 (the second lease payment and depreciation). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2015 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500. P 15-15 Sales-type lease; bargain purchase option exercisable before lease term ends; lessor and lessee LO3 LO5 LO6 LO7 LO8 p. 864 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, 2011, the company leased a delivery truck to a local florist, Anything Grows. The lease agreement specified quarterly payments of $3,000 beginning September 30, 2011, the inception of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2014 (three-year lease term). The florist had the option to purchase the truck on September 29, 2013, for $6,000 when it was expected to have a residual value of $10,000. The estimated useful life of the truck is four years. Mid-South Auto Leasing's quarterly interest rate for determining payments was 3% (approximately 12% annually). 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 exercisable 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. (Be careful to note that, although payments occur on the last calendar day of each quarter, since the first payment was at the inception of the lease, payments represent an annuity due.) 2. Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2011. 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, 2011. 5. Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2013, assuming the bargain purchase option was exercised on that date.

Student Name: Class: Problem 15-08 RHONE-METRO INDUSTRIES Annual Rental Payments Requirement 1: Lessor's Calculation of Rental Payments Amount to be recovered (fair market value) Less: Present value of the guaranteed residual value Amount to be recovered through periodic rental payments Rental payment at the beginning of each of four years Requirement 2: Present Value of Minimum Lease Payments Present value of periodic rental payments Plus: Present value of the lessee-guaranteed residual value Present value of minimum lease payments (a) By Western Soya Co. (the lessee) (b) By Rhone-Metro (the lessor) Requirement 3: Journal entries on December 31, 2009 General Journal Account Western Soya Co. (Lessee) Leased equipment Lease payable Debit Credit Lease payable Cash Rhone-Metro (Lessor) Lease receivable Inventory of equipment Cash Lease receivable Requirement 4: Lease Amortization Schedule Dec. 31 2009 2009 2010 2011 2012 2013 Payments Effective Interest 10% Decrease Outstanding in Balance Balance Requirement 5: Journal entries on December 31, 2010 General Journal Account Western Soya Co. (Lessee) Interest expense Lease payable Cash Debit Credit Depreciation expense Accumulated depreciation Rhone-Metro (Lessor) Cash Lease receivable Interest revenue Requirement 6: Journal entries on December 31, 2013 General Journal Account Western Soya Co. (Lessee) Depreciation expense Accumulated depreciation Interest expense Lease payable Accumulated depreciation Loss on residual value guarantee Leased equipment Cash Rhone-Metro (Lessor) Inventory of equipment Cash Lease receivable Interest revenue Debit Credit Given Data P15-08: RHONE-METRO INDUSTRIES Lease length Equipment cost Expected useful life Lessee-guaranteed residual value Lease payments Incremental borrowing rate Implicit interest rate 4 years $365,760 6 years $25,000 $100,000 12% 10% Student Name: Class: Problem 15-15 Requirement 1: MID-SOUTH AUTO LEASING Dealer's Profit Present value of quarterly rental payments Plus: Present value of the BPO price Present value of minimum lease payments Truck's cost Dealer's profit Lessor's Calculation of Quarterly Payments Amount to be recovered (fair market value) Less: Present value of the BPO price Amount to be recovered through quarterly lease payments Rent payment at the beginning of each of the next 8 quarters Requirement 2 Journal entries on September 30, 2009 General Journal Account Anything Grows (Lessee) Leased equipment Lease payable Debit Credit Lease payable Cash Mid-South Auto Leasing (Lessor) Lease receivable Cost of goods sold Sales revenue Inventory of equipment Cash Lease receivable Requirement 3: Lease Amortization Schedule Date 9/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/29/2011 Effective Interest Decrease Outstanding Payments 3% in Balance Balance Requirement 4: Journal entries on December 31, 2009 General Journal Account Anything Grows (Lessee) Depreciation expense Accumulated depreciation Debit Credit Interest expense Lease payable Cash Mid-South Auto Leasing (Lessor) Cash Lease receivable Interest revenue Requirement 5: Journal entries on September 29, 2011 General Journal Account Anything Grows (Lessee) Depreciation expense Accumulated depreciation Interest expense Lease payable Cash Mid-South Auto Leasing (Lessor) Cash Lease receivable Interest revenue Debit Credit Given Data P15-15: MID-SOUTH AUTO LEASING Quarterly payments Truck purchase price at end of lease Residual value Estimated useful life Quarterly interest rate Original truck purchase price $3,000 $6,000 $10,000 4 years 3% $25,000