Case Study Of The BPO

Problem 15-15
Requirement 1 Note: Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price ($6,000) is expected to occur when the option becomes exercisable (at the end of the eighth quarter). Also, the lease contract specifies that the BPO becomes exercisable before the designated lease term ends. Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable (after two years of the three-year lease term).
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Present value of quarterly lease payments ($3,000 x 7.23028**) $21,691
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Plus: Present value of the BPO price ($6,000 x .78941*) 4,736
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Present value of minimum lease payments $26,427
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* present value of $1: n=8, i=3%
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** present value of an annuity due of $1: n=8, i=3%
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“Selling price” $26,427 minus Truck’s cost (25,000) equals Dealer’s profit $ 1,427

Problem 15-15 (continued)
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Not required in the problem, but helpful to see that the present value calculation is precisely the reverse of the lessor’s calculation of quarterly payments:
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Amount to be recovered (fair value) $26,427

Less: Present value of the BPO price ($6,000 x .78941*) (4,736)
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Amount to be recovered through quarterly lease payments $21,691
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_____________________
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Lease payments at the beginning
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each of the next eight quarters: ($21,691 ÷ 7.23028**) $3,000
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* present value of $1: n=8, i=3%
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** present value of an annuity due of $1: n=8, i=3%
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Requirement 2
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September 30, 2011
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Anything Grows (Lessee)
Leased equipment 26,427 Lease payable (present value of minimum lease payments) 26,427

Lease payable 3,000 Cash (lease payment) 3,000
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Mid-South Auto Leasing (Lessor)
Lease receivable (calculated above) 26,427
Cost of goods sold (lessor’s cost) 25,000 Sales revenue (calculated above) 26,427
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Inventory of equipment (lessor’s cost) 25,000

Cash (lease payment) 3,000 Lease receivable 3,000

Problem 15-15 (continued)
Requirement 3 Since both use the same discount rate, the amortization schedule for the lessee and lessor is the same:

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

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