Question

On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $45,114. The lease agreement specified annual payments of $11,000 beginning December 31, 2018, the beginning of the lease, and at each December 31 through 2021. Branch Motors' interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2022) the truck was expected to be worth $15,000. 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 $6,000. Yard Art's incremental borrowing rate is 9% and is unaware of Branch's implicit rate. A $1,000 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 $11,000 lease payments. (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)? 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 $11,000 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 $4,000 on that date. Answer is not complete.

Answer 1

_ A 1 Req 1: G H The lease will be classified as "Finance lease" if the lease term is subtantially equivelant to the life period of asset since in given case, Asset life is 5 years and lease period is 4 years then the said lease can be considered as "Finance Lease" Calculation of Right of Use Asset value for Yard Art 2 3 Req 2: Date Lease Payment (Note 1) PV Factor @ 9% Present Value 4 5 6 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 100001 10000 0.917 10000 0.842 10000 0.772 6000 0.708 Value for Right of Use Asset 10000.00 9174.31 8416.80 7721.83 4250.55 39563.00 9 11 12 Working can be shown as below: 13 Date Lease Payment (Note 1) PV Factor @ 9% Present Value 14 15 16 17 18 19 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 =11000-1000 =11000-1000 =11000-1000 =11000-1000 6000 1 =C15*D15 =1/1.09 =C16*D16 =1/1.09^2 =C17*D17 =1/1.0913 =C18*D18 =1/1.0944 =C19*D19 Value for Right of Use Asset =ROUND(SUM(E15:E19),0) 20 21 Note 1: Lease Amount for right of asset will be considered 11000-1000= $ 10000 only. 22 23 24 Req 3: This lease will be considered as "Sales type lease" by Branch Motors since lease receivable is higher than cost involved in it.

D E F G | I _ A 25 26 Reg 4: Calculation of Annual Lease Payment Retail Value PV of Residual Value Net Asset Value PV Factor @ 10% Lease amount Maintenance Annual Lease Fee payment 1000 1000 $ 11,000 45114 10245.20 34868.80 3.49 | *10,000.00 Working can be shown as below: Retail Value PV of Residual Value Net Asset Value Maintenance Annual Lease PV Factor @ 10% Lease amount Fee payment =1+1/1.1+1/1.1^2+1/1.1^3 =ROUND(D32/E32,0) 1000 =F32+G32 45114 = 15000*1/1.114 =B32-C32 34 Req 5: Present Value Calculation of Sales Revenue for Branch Motors Annual Lease Payment for giving PV Factor @ 10% Right to Use 10000 1.00 10000 0.91 10000 0.83 10000 0.75 15000 0.68 Sales Revenue 10000.00 9090.91 8264.46 7513.15 10245.20 45114.00 Note 1: for Calculating Sales revenue, only annual lease payment of $ 10000 will be considered as this amount is specifically for giving right to use to Yart Art. 45 Req 6: 46 Amount ($) 47 48 Date Dec 31, 2018 Yard Art Journal Entries Particulars Amount ($) Right of Use Asset 39563 Lease payable (For recording lease payable) 49 39563

B. Dec 31, 2018 10000 1000 Lease payable Prepaid maintenance expense Cash (For payment of lease payment) 11000 Amount ($) Date Dec 31, 2018 Branch Motors Journal Entries Particulars Amount ($) Lease Receivable 45114 Cost of Good sold 40000 Sales revenue Equipment (For recording Sales Revenue) 45114 40000 Dec 31, 2018 11000 Cash Maintenance payable lease receivable (For receipt of Annual lease payment) 1000 10000 73 Req 7: Balance Amortisation Schedule for Interest Expense (Yard Art) Annual Lease Payable Right of Use Value Interest Expense for right to use 39563 10000.00 29563 2661 10000.00 22224 2000 10000.00 14224 1280 10000.00 29563 22224 14224 5504

B 5504 495 6000.00 0.00 Working can be shown as below: Right of Use Value Interest Expense Balance 39563 =E83 =E84 =E85 =E86 =B84*9% =B85*9% =B86*9% =B87*9% Annual Lease Payable for right to use =11000-1000 =11000-1000 =11000-1000 =11000-1000 6000 =B83-D83 =B84+C84-D84 =B85+C85-D85 =B86+C86-186 =ROUND(B87+C87-D87,-1) 89 Req 8: Amortisation Schedule for Interest Revenue (Branch Motors) Lease Receivable Interest Revenue Annual Lease Amount 45114 10000.00 35114 3511 10000.00 28625 2863 10000.00 21488 2149 10000.00 13637 1364 15000. 00 Balance 35114 28625 21488 13637 0 Working can be shown as below: Lease Receivable Interest Revenue 45114 =E99 =B100*10% =E100 =B101* 10% =E101 =B102*10% =E102 =B103*10% Annual Lease Amount 10000 10000 10000 10000 15000 Balance =B99-D99 =B100+C100-D100 =B101+C101-D101 =B102+C102-D102 =B103+C103-D103

B А 105 Req 9: 106 107 108 Amount ($) Date Dec 31, 2019 Yard Art Journal Entries Particulars Amount ($) Lease payable 7339 Interest Expense 2661 Prepaid maintenance expense 1000 Cash (For payment of lease amount) 109 110 111 11000 112 113 Dec 31, 2019 9890.75 114 115 Depreciation (39563/4) Right of Use Asset (For Depreciation Expense) 9890.75 116 117 118 119 120 121 122 Amount ($) Date Dec 31, 2019 123 Branch Motors Journal Entries Particulars Amount ($) Cash 11000 Interest revenue Maintenance payable lease receivable (For receipt of Annual lease payment) 124 125 3511 1000 6489 126 127