On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch M

Question

On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $38,000 for the truck. Its retail value is $44,910 The lease agreement specified annual payments of $12,500 beginning December 31, 2018, the beginning of the lease, and at each December 31 through 2021. Branch Motors' interest rate for determining payments was 8%. At the end of the four-year lease term (December 31, 2022) the truck was expected to be worth $10,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line amortization or depreciation Yard Art guaranteed a residual value of $5,000. Yard Art's incremental borrowing rate is 6% and is unaware of Branch's implicit rate A $2,000 per year maintenance agreement was arranged for the truck with an outside service firm. As an expedient, Branch Motors agreed to pay this fee. It is, however, reflected in the $12,500 lease payments. (FV of $1. PV of $1. FVA of $1. PVA of $1, FVAD of $1 and AD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. How should this lease be classified by Yard Art Landscaping (the lessee)? 2. Calculate the amount Yard Art Landscaping would record as a right-of-use asset and a lease liability 3. How should this lease be classified by Branch Motors (the lessor)? 4. Show how Branch Motors calculated the $12,500 annual lease payments. 5. Calculate the amount Branch Motors would record as sales revenue 6. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2018 7. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art. 8. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors. 9. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2019 10. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2021 (the final lease payment) 11. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2022 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $3,000 on that date

Explanation / Answer

As per policy only first four questions will be answered.

Part 1

This lease be classified by yard art landscaping as aCapital lease because thelease term is equal to 75% or more of the expected economiclife of the asset.

Part 2

Present value of periodic lease payments excluding executory costs of $2000 ($10,500 x 3.46511**)...................... $36,384

Plus: Present value of the lessee-guaranteed residual value ($5,000 x 0.79209*) .......................................................3960

Presentvalue of lessee’s minimum lease payments.....$40,344

* Present value of $1: n = 4, i = 6%

** Present value of an annuity due of $1: n = 4, i = 6%

Part 3

This is sales - type lease because the fair value exceeds the lessor’s carrying value, the asset is being “sold” at a profit.

Part 4

Amount to be recovered (fair value)............................... $44910

Less: Present value of the residual value ($10,000 x 0.73503*)......................................................(7350)

Amount to be recovered through periodic lease payments..................................................$37,560

Lease payments at the beginning of each of the next four years: ($37,560 ÷ 3.57710**).............................. $10,500

Plus: Executory costs................................................2,000

Lease payments including executory costs ..........$12,500

* Present value of $1: n = 4, i = 8%

** Present value of an annuity due of $1: n = 4, i = 8%

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