“Sales-Type/BPO Lease Problem: Sheldon Co. leases some heavy construction equipment from Molly Inc. The lease is for 5 years and the $250,000 payments are made semi-annually beginning on August 1, 2005, the day the lease is signed. The equipment has a life of 8 years. At the end of the lease, Sheldon can purchase the equipment using a bargain purchase option in the lease. The BPO is $400,000. Molly charges an interest rate of 8%. The FMV of the equipment at the inception of the lease is $2,379,058.57. At the end of the lease, Sheldon exercises the BPO. The cost of the equipment to Molly is $2,000,000. Molly has no significant uncertainties about future reimbursable costs. Also, collectability of the cash is reasonably assured. Assume that Molly makes reversing entries at the beginning of each year- be careful of this when reporting financial statement balances. Prepare an amortization table for the lease.
Prepare the journal entries that Molly would record for each year of the lease. You do not have to record the reversing entries for the purposes of this exercise. You will need to assume they are made, but I am not asking you to record them here. You may elect to do so if it helps you keep track of what is going on. For the years ended 2006 and 2007, identify what would appear on the Balance Sheet, Income Statement and Statement of Cash Flows for Molly, related to the lease. On the Balance Sheet, you need to separate the current assets from the non current assets. On the Statement of Cash Flows assume the direct method is used. Also, indicate the section of the statement the cash flow would appear in and identify the source or use of cash (ex. Operating section –cash received from dividends). Ignore taxes. You need not report cash on the balance sheet.
I have completed the amortization table and journal entries and believe I did them correctly. However, it is a different story with the financial statements. I’m not an idiot but I really feel like one. I lack confidence in my financial statement abilities because we aren’t instructed how to calculate and report in certain circumstances, and I lack background accounting knowledge. I feel like I am doing them incorrectly, and I am confused on the statement of cash flows. We spent point two seconds on that. This is my first accounting class in years, and I know only what is provided from the professor and the book. The internet has offered no help- I’ve looked for days! I know I am making a mountain out of a molehill. “