Use the information for P20€“20.
In P Sanderson Inc., a pharmaceutical distribution firm, is providing a BMW car for its Chief Executive Officer as part of a remuneration package. Sanderson has a calendar year end, issues financial statements annually, and follows private enterprise GAAP. You have been assigned the task of calculating and reporting the financial statement effect of several options Sanderson is considering in obtaining the vehicle for its CEO.
Option 1: Obtain financing from Western Bank to finance an outright purchase of the BMW from BMW Canada, which regularly sells and leases luxury vehicles.
Option 2: Sign a lease with BMW Canada and exercise the option to renew the lease at the end of the initial term.
Option 3: Sign a lease with BMW Canada and exercise the option to purchase at the end of the lease. The amount of the option price is financed with a bank loan.
For the purpose of your comparison, you can assume a January 1, 2011 purchase and you can also exclude all amounts for any provincial sales taxes, GST, and HST on all the proposed transactions. You can also assume that Sanderson uses the straight-line method of depreciating automobiles. Assume that for options 1 and 2, the BMW is sold on January 1, 2016, for $10,000.
Sanderson does not expect to incur any extra kilometre charges because it is likely that the BMW won€™t be driven that much by the CEO. However, there is a 10% chance that an extra 10,000 km will be driven and a 15% chance that an extra 20,000 km will be used.
Terms and values concerning the asset that are common to all options:

Borrowing terms with Western Bank for purchase: Option 1

For Option 2:
Terms, conditions, and other information related to the initial lease with BMW Canada:

Terms, conditions, and other information related to the renewal option for lease with BMW Canada:

Borrowing terms with Western Bank to exercise option to purchase: Option 3

Instructions
Under Option 2:
(a) Assume that at the signing of the original lease, Sanderson Inc. has no intention of exercising the lease renewal. Determine the classification of the three-year lease for BMW Canada, which follows private enterprise GAAP.
(b) Prepare the journal entry to show how BMW Canada records the collection of the first lease payment on January 1, 2011.
(c) Assume now that Sanderson Inc. signs the renewal option at the same time that it enters into the original lease agreement.
1. Prepare a lease amortization schedule including the renewal period for BMW Canada.
2. Determine the classification of the lease for BMW Canada.
3. Record all of the necessary transactions on January 1, 2011, for the first two lease payments collected and for any adjusting journal entries at the end of the fiscal year ending December 31, 2011, for BMW Canada.

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Date of purchase or signing of lease Purchase price equal to fair value at January 1, 2011 Cost to BMW Canada Physical life Useful life to Sanderson Residual value at January 1, 2016, equal to fair value Fair value at January 1, 2014 January 1, 2011 $79,000 $70,000 8 years 5 years $10,000 $39,500 Loan amount Fixed bank rate for loan to purchase Term of loan to purchase Repayment terms First payment due $79,000 7% 5 years Quarterly instalment note April 1, 2011 Lease term First lease payment date Monthly lease payment Maximum number of kilometres allowed under lease Excess kilometre charge beyond 72,000 km Option to purchase price at end of lease Date of payment for option to purchase Maintenance and insurance Interest rate stated in lease annual Sanderson's incremental borrowing rate 36 months January 2011 $1,392.21 72,000 25 cents 50% of original fair value January 1, 2014 paid by Sanderson 8% 7% Renewal lease term Renewal option first lease payment date Monthly lease payment Maximum number of kilometres allowed under renewal lease Excess kilometre charge beyond 48,000 km Option to purchase at end of renewal option Maintenance and insurance Renewal option Interest rate stated in renewal lease Sanderson's incremental borrowing rate (projected) 24 months January 1, 2014 $1,371.00 48.000 25 cents hone paid by Sanderson none 7% 8% Loan amount Bank rate January 1, 2014 Term of loan January 1, 2014 Repayment terms First payment due $39,500 8% 2 years Quarterly instalment note April 1, 2014