Problem 15-9 (Algo) Sales-type lease; purchase option reasonably certain to be exercised before lease term ends; lessor and lessee [LO15-3, 15-6]

Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying. On September 30, 2024, the company leased a delivery truck to a local florist, Anything Grows.

• The fiscal year for both companies ends December 31.
• The lease agreement specified quarterly payments of $3,950 beginning September 30, 2024, the beginning of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2027 (three-year lease term).
• The florist had the option to purchase the truck on September 29, 2026, for $7,900 when it was expected to have a residual value of $12,850.
• The estimated useful life of the truck is four years.
• Mid-South Auto Leasings quarterly interest rate for determining payments was 2% (approximately 8% annually). Mid-South paid $32,980 for the truck.
• Both companies use straight-line depreciation or amortization.
• Anything Grows incremental interest rate is 8%.

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

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:

1. Calculate the amount of selling 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 beginning of the lease, payments represent an annuity due.)
2. Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2024.
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, 2024.
5. Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2026, assuming the purchase option was exercised on that date.

Problem 15-9 (Algo) Sales-type lease; purchase option reasonably certain to be exercised before lease term ends; lessor and lessee [LO15-3, 15-6] Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying. On September 30, 2024, the company leased a delivery truck to a local florist, Anything Grows. - The fiscal year for both companies ends December 31. - The lease agreement specified quarterly payments of $3,950 beginning September 30,2024 , the beginning of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2027 (three-year lease term). - The florist had the option to purchase the truck on September 29,2026 , for $7,900 when it was expected to have a residual value of $12,850. - The estimated useful life of the truck is four years. - Mid-South Auto Leasing's quarterly interest rate for determining payments was 2% (approximately 8% annually). Mid-South paid $32,980 for the truck. - Both companies use straight-line depreciation or amortization. - Anything Grows' incremental interest rate is 8%. Hint: A lease term ends for accounting purposes when an option becomes exercisable if it's expected to be exercised (i.e., a BPO). Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1 ) Required: 1. Calculate the amount of selling 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 beginning of the lease, payments represent an annuity due.) 2. Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2024. 3. Prepare an amortization schedule(s) describing the pattern of interest expense for Anything Grows and interest revenue for MidSouth Auto Leasina over the lease term. 1. Calculate the amount of selling 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 beginning of th lease, payments represent an annuity due.) 2. Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2024. 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, 2024. 5. Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2026, assuming the purchase option was exercised on that date