A new desktop CNC Training Lathe has a list price of $19,800 and a 15âyear estimated life. It is going to be placed in the Manufacturing Laboratory on January 1, 2017. The permissible salvage value of the lathe is zero at the end of 15 years. The double declining balance will be used for the depreciation schedule. For the purpose of switchover to straight line, write a complete depreciation schedule (show your work for both depreciation schedules) and recommend which method and year are appropriate for switchover purpose. A switchover can be made only once during the asset's life.
A new desktop CNC Training Lathe has a list price of $19,800 and a 15âyear estimated life. It is going to be placed in the Manufacturing Laboratory on January 1, 2017. The permissible salvage value of the lathe is zero at the end of 15 years. The double declining balance will be used for the depreciation schedule. For the purpose of switchover to straight line, write a complete depreciation schedule (show your work for both depreciation schedules) and recommend which method and year are appropriate for switchover purpose. A switchover can be made only once during the asset's life.
Related questions
Problem 15-16 Lessee-guaranteed residual value; third-party guaranteed residual value; unguaranteed residual value; executory costs; different interest rates for lessor and lessee [LO15-3, 15-5, 15-8, 15-9]
| On December 31, 2013, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $35,000 for the truck. Its retail value is $59,816. |
| The lease agreement specified annual payments of $17,000 beginning December 31, 2013, the inception of the lease, and at each December 31 through 2016. Branch Motorsâ interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2017) the truck was expected to be worth $11,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line depreciation. |
| Yard Art guaranteed a residual value of $4,000. Guarantor Assurance Corporation was engaged to guarantee a residual value of $7,000, but with a deductible equal to any amount paid by the lessee ($7,000 reduced by any amount paid by the lessee). Yard Artâs incremental borrowing rate is 9%. |
| A $2,000 per year maintenance agreement 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 $17,000 lease payments. |
| Collectibility of the lease payments by Yard Art is reasonably predictable and there are no costs to the lessor 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 appropriate factor(s) from the tables provided.) |
| Required: |
| 1. | How should this lease be classified by Yard Art Landscaping (the lessee)? | ||||||||
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| 2. | Calculate the amount Yard Art Landscaping would record as a leased asset and a lease liability.(Round your intermediate calculations to the nearest dollar amount.) |
| 3. | How should this lease be classified by Branch Motors (the lessor)? |
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| 4. | Show how Branch Motors calculated the $17,000 annual lease payments. |
| 5. | Calculate the amount Branch Motors would record as sales revenue. (Round your intermediate calculations to the nearest dollar amount.) |
| 6. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 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, 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 10. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2016 (the final lease payment). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 11. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2017 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $2,000 on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
