On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382.
The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motorsâ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation.
Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Artâs incremental borrowing rate is 9%.
A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments.
Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)
Required:
1.
How should this lease be classified by Yard Art Landscaping (thelessee)?
2.
Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.)
3.How should this lease be classified by Branch Motors (thelessor)?
Operating lease
Capital lease: Sales-type lease
Capital lease
Capital lease: Direct financing lease
4.Show how Branch Motors calculated the $13,000 annual leasepayments.
Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value
Less:Present value of the residual value
Amount to be recovered through periodic lease payments
Lease payments at the beginning of each of the next fouryear
Add: Executory costs1,000Lease payments including executorycosts
5.
Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.)
6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount
·
1.
Record the lease for Yard Art.
· 2.
Record the lease payment for Yard Art.
· 3.
Record the lease for Branch Motors.
· 4.
Record cash received by Branch Motors
7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art.
8.
Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors.
9.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2017. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field. Round your intermediate calculations to the nearestdollar amount.)
· 1.
Record the maintenance expense for Yard Art.
2.
Record the lease payment for Yard Art.
3.
Record the depreciation expense for Yard Art.
4.
Record the cash received on lease by Branch Motors.
10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)
· 1.
Record the maintenance expense for Yard Art.
· 2.
Record the lease payment for Yard Art.
· 3.
Record the depreciation expense for Yard Art.
· 4.
Record the cash received on lease by Branch Motors.
11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)
· 1.
Record the maintenance expense for Yard Art.
· 2.
Record the depreciation expense for Yard Art.
· 3.
Record the last payment on lease for Yard Art.
· 4.
Record the last cash receipt on lease and settlement of lease byBranch Motors.
On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382. |
The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motorsâ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation. |
Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Artâs incremental borrowing rate is 9%. |
A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments. |
Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.) |
Required: |
1. | How should this lease be classified by Yard Art Landscaping (thelessee)? | |
2. | Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.) | |
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Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value
Less:Present value of the residual value
Amount to be recovered through periodic lease payments
Lease payments at the beginning of each of the next fouryear
Add: Executory costs1,000Lease payments including executorycosts
5. | Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.) |
6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount
·
1.
Record the lease for Yard Art.
· 2.
Record the lease payment for Yard Art.
· 3.
Record the lease for Branch Motors.
· 4.
Record cash received by Branch Motors
7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art. | |
8. | Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors. | |
| ||
| · 1. Record the maintenance expense for Yard Art. 2. Record the lease payment for Yard Art. 3. Record the depreciation expense for Yard Art. 4. Record the cash received on lease by Branch Motors. | ||
10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)
· 1.
Record the maintenance expense for Yard Art.
· 2.
Record the lease payment for Yard Art.
· 3.
Record the depreciation expense for Yard Art.
· 4.
Record the cash received on lease by Branch Motors.
11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)
· 1.
Record the maintenance expense for Yard Art.
· 2.
Record the depreciation expense for Yard Art.
· 3.
Record the last payment on lease for Yard Art.
· 4.
Record the last cash receipt on lease and settlement of lease byBranch Motors.
