Lease Amortization Schedule

Effective Decrease Outstanding Payments Interest in Balance Balance 9% x Outstanding Balance

663,625

1/1/11 110,000 110,000 553,625

12/31/11 110,000 .09 (553,625) = 49,826 60,174 493,451

12/31/12 110,000 .09 (493,451) = 44,411 65,589 427,862

12/31/13 110,000 .09 (427,862) = 38,508 71,492 356,370

12/31/14 110,000 .09 (356,370) = 32,073 77,927 278,443

12/31/15 110,000 .09 (278,443) = 25,060 84,940 193,503

12/31/16 110,000 .09 (193,503) = 17,415 92,585 100,918

12/31/17 110,000 .09 (100,918) = 9,082* 100,918 0

880,000 216,375 663,625

* adjusted for rounding of other numbers in the schedule

Problem 15-18 (concluded)

Requirement 6

December 31, 2011

Red Baron Flying Club (Lessee) Interest expense(10% x [$645,526 – 110,000]) 53,553 Lease payable (difference) 56,447 Cash(lease payment) 110,000 Depreciation expense ($645,526 ÷ 8 years) 80,691 Accumulated depreciation 80,691 Bidwell Leasing (Lessor) Cash(lease payment) 110,000 Lease receivable (difference) 60,174

Interest revenue(9% x [$663,625 – 110,000]) 49,826

Requirement 7

December 31, 2017

Red Baron Flying Club (Lessee) Interest expense(10% x $100,000: from schedule) 10,000 Lease payable (difference) 100,000 Cash(lease payment) 110,000 Depreciation expense ($645,526 ÷ 8 years) 80,691 Accumulated depreciation 80,691 Bidwell Leasing (Lessor) Cash(lease payment) 110,000 Lease receivable (difference) 100,918 Interest revenue(9% x $100,918: from schedule) 9,082

Problem 15-19

Requirement 1

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? {8 yrs>75% of 8 yrs} 4 Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? {$645,526^a>90% of $645,526}^a See calculation below.

The lessee’s incremental borrowing rate (11%) is more than the lessor’s implicit rate (10%). So, both parties’ calculations should be made using a 10% discount rate:

Present value of minimum lease payments ($110,000 x 5.86842^**) $645,526

^** present value of an annuity due of $1: n=8, i=10%

Problem 15-19 (continued)

(a) 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 (Bidwell Leasing).

Since the fair value exceeds the lessor’s carrying value, the plane was “sold” at a profit, making this a sales-type lease:

Fair value $645,526

minus

Carrying value (400,000)

equals

Dealer’s profit $ 245,526

(b) Since at least one (two in this case) criterion is met, this is a capital lease to the lessee. Red Baron records the present value of minimum lease payments as a leased asset and a lease liability.

Requirement 2

January 1, 2011

Red Baron Flying Club (Lessee) Leased equipment (calculated above) 645,526 Lease payable (calculated above) 645,526 Lease payable 110,000 Cash(lease payment) 110,000 Bidwell Leasing (Lessor) Lease receivable (calculated above) 645,526 Cost of goods sold (lessor’s cost) 400,000 Sales revenue (calculated above) 645,526 Inventory of equipment (lessor’s cost) 400,000 Selling expense 18,099 Cash (initial direct costs) 18,099 Cash(lease payment) 110,000 Lease receivable 110,000

Problem 15-19 (continued)

Requirement 3