Lease Amortization Schedule

Effective Decrease Outstanding Date Payments Interest in Balance Balance 3% x Outstanding Balance

9/30/11 26,427

9/30/11 3,000 3,000 23,427

12/31/11 3,000 .03 (23,427) = 703 2,297 21,130

3/31/12 3,000 .03 (21,130) = 634 2,366 18,764

6/30/12 3,000 .03 (18,764) = 563 2,437 16,327

9/30/12 3,000 .03 (16,327) = 490 2,510 13,817

12/31/12 3,000 .03 (13,817) = 415 2,585 11,232

3/31/13 3,000 .03 (11,232) = 337 2,663 8,569

6/30/13 3,000 .03 (8,569) = 257 2,743 5,826

9/29/13 6,000 .03 (5,826) = 174* 5,826 0

30,000 3,573 26,427

* adjusted for rounding of other numbers in the schedule

Problem 15-15 (concluded)

Requirement 4

December 31, 2011

Anything Grows (Lessee)

Depreciation expense ([$26,427 ÷ 4 years*] x¹/₄ year)1,652 Accumulated depreciation 1,652 Interest expense(3% x [$26,427 – 3,000]: from schedule) 703 Lease payable (difference : from schedule) 2,297 Cash(lease payment) 3,000 Mid-South Auto Leasing (Lessor) Cash(lease payment) 3,000 Lease receivable (difference : from schedule) 2,297

Interest revenue(3% x [$26,427 – 3,000]) 703

* Because title passes with the expected exercise of the BPO, depreciation is over the full 4-year useful life.

Requirement 5

September 29, 2013

Anything Grows (Lessee) Depreciation expense ([$26,427 ÷ 4 years*] x³/₄year) 4,955 Accumulated depreciation 4,955 Interest expense(3% x $5,826 : from schedule) 174 Lease payable (difference: from schedule) 5,826 Cash(BPO price) 6,000 Mid-South Auto Leasing (Lessor) Cash(BPO price) 6,000 Lease receivable (difference: from schedule) 5,826

Interest revenue(3% x $5,826: from schedule) 174

* Because title passes with the expected exercise of the BPO, depreciation is over the full 4-year useful life.

Problem 15-16

Requirement 1

Since at least one (exactly one in this case) criterion is met, this is a capital lease to the lessee:

Lessee’s Application of Classification Criteria

1 Does the agreement specify that ownership of the asset transfers to the lessee? NO 2 Does the agreement contain a bargain purchase option? NO 3 Is the lease term equal to 75% or more of the expected YES economic life of the asset? {4 yrs>75% of 5 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the NO fair value of the asset? {$39,564^a<90% of $45,114 = $40,603}^a See schedule 1 below.

The lessee’s incremental borrowing rate (9%) is less than the lessor’s implicit rate (10%). So, calculations should be made using a 9% discount rate.

Problem 15-16 (continued)

Schedule 1: Lessee’s Calculation of the Present Value of Minimum Lease Payments

Present value of periodic lease payments excluding executory costs of $1,000 ($10,000 x 3.53129^**) $35,313

Plus: Present value of the lessee-guaranteed residual value ($6,000 x .70843^*) 4,251

Present value of lessee’s minimum lease payments $39,564

^* present value of $1: n=4, i=9%

^** present value of an annuity due of $1: n=4, i=9%

Requirement 2

Present value of lessee’s minimum lease payments, calculated in Schedule 1 above: $39,564

The leased asset should not be recorded at more than its fair value (not a factor in this case).

Requirement 3

Since at least one (two in this case) classification criterion and both additional lessor conditions are met, this is a capital lease to the lessor.

Problem 15-16 (continued)