912 SECTION 3 Financial Instruments and Liabilities 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, 2016. 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, 2016 (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, 2022 (the final lease payment). (Note: This problem is a variation of P 15–18 modified to cause the lease to be a sales-type lease.) Bidwell Leasing purchased a single-engine plane for $400,000 and leased it to Red Baron Flying Club for its fair value of $645,526 on January 1, 2016. Terms of the lease agreement and related facts were: a. Eight annual payments of $110,000 beginning January 1, 2016, the inception of the lease, and at each December 31 through 2022. Bidwell Leasing’s implicit interest rate was 10%. The estimated useful life of the plane is eight years. Payments were calculated as follows: P 15–19 Initial direct costs; sales-type lease ● LO15–3, LO15–6, LO15–9 Amount to be recovered (fair value) $645,526 Lease payments at the beginning of each of the next eight years: ($645,526 5 5.86842*) $110,000 *Present value of an annuity due of $1: n 5 8, i 5 10%. 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, 2016. 3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. 4. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2016 (the second lease payment). Both companies use straight-line depreciation. 5. Prepare the appropriate entries for both Red Baron and Bidwell Leasing on December 31, 2022 (the final lease payment). To raise operating funds, North American Courier Corporation sold its building on January 1, 2016, to an insurance company for $500,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2025, at which time ownership of the building will revert to North American Courier. The building has a book value of $400,000 (original cost $1,000,000). The lease requires North American to make payments of $88,492 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 12%. 15–20 Sale-leaseback ● LO15–5, LO15–10
Spiceland_Inter_Accounting8e_Ch15
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