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. Comnlete this question by entering your answers in the the below

The answer is not 39563 or 39564

Answer 1

1) In the books of Lessee- Yard Art

In case of Finance lease, the Lease asset and lease liability should be recognised at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the entity's incremental borrowing rate)

2)

PV of Minimum Lease Payments
Year	MLP	PVF @ 9%	PV cash flows
0	10000	1	$10,000
1	10000	0.9174312	$9,174
2	10000	0.84168	$8,417
3	10000	0.7721835	$7,722
4	6000	0.7084252	$ 4,251
			$39,563

31 December Right of Use asset a/c $39,563

Lease Liability a/c $39,563

4) In the books of Lessor, the Lease receivable is recorded at the Net Investment in lease and the difference b/w receivable and carrying amount of asset is recognised as profit on lease.

Net Investment in Lease
Year	MLP+URV	PVF @ 10%	PV cash flows
0	10000	1	$      10,000
1	10000	0.9090909	$         9,091
2	10000	0.8264463	$         8,264
3	10000	0.7513148	$         7,513
4	15000 (6000+9000)	0.6830135	$      10,245
			$      45,114

While the PV of any GRV is included in sales revenue, PV of URV(9000*0.6830=6147) shall be reduced from both sales revenue and COGS to recognize the fact that the lessor expects to receive residual value specific to the lease term(which is guaranteed).

31 December:

Lease Receivable $45,114   

COGS (40000-6147) $33,853

Sales Revenue (45114-6147) $38,967   

Equipment $40,000

Hope this helps...