Question

On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $39,000 for the truck. Its retail value is $42,382.

The lease agreement specified annual payments of $13,000 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 $11,000. 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 9% and is unaware of Branch’s implicit rate.

A $3,000 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 $13,000 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 $13,000 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 $3,000 on that date.

TABLE 6 Present Value of an Annuity Due of $1 PVAD = (1 - 17+ iP]x (1 +) n/i 1 2 3 4 5 1.0% 1.00000 1.99010 2.97040 3.94099 4.90197 1.5% 2.0% 1.00000 1.00000 1.98522 1.98039 2.95588 2.94156 3.91220 3.88388 4.85438 4.80773 2.5% 1.00000 1.97561 2.92742 3.85602 4.76197 3.0% 1.00000 1.97087 2.91347 3.82861 4.71710 3.5% 1.00000 1.96618 2.89969 3.80164 4.67308 4.0% 4.5% 1.00000 1.00000 1.96154 1.95694 2.88609 2.87267 3.77509 3.74896 4.62990 4.58753 5.0% 1.00000 1.95238 2.85941 3.72325 4.54595 5.5% 6.0% 7.0% 1.00000 1.00000 1.00000 1.94787 1.94340 1.93458 2.84632 2.83339 2.80802 3.69793 3.67301 3.62432 4.50515 4.46511 4.38721 8.0% 9.0% 1.00000 1.00000 1.92593 1.91743 2.78326 2.75911 3.57710 3.53129 4.312134.23972 10.0% 11.0% 12.0% 20.0% 1.00000 1.00000 1.00000 1.00000 1.90909 1.90090 1.89286 1.83333 2.73554 2.71252 2.69005 2.52778 3.48685 3.44371 3.40183 3.10648 4.16987 4.10245 4.03735 3.58873 6 7 8 9 10 5.85343 5.78264 5.71346 5.64583 6.79548 6.69719 6.60143 6.50813 7.72819 7.59821 7.471997.34939 8.65168 8.48593 8.32548 8.17014 9.56602 9.36052 9.16224 8.97087 5.57971 5.51505 5.45182 6.41719 6.32855 6.24214 7.23028 7.11454 7.00205 8.01969 7.87396 7.73274 8.78611 8.607698.43533 5.38998 5.32948 6.15787 6.07569 6.89270 6.78637 7.595897.46321 8.26879 8.10782 5.27028 5.99553 6.68297 7.33457 7.95220 5.21236 5.10020 4.99271 4.88965 5.91732 5.76654 5.62288 5.48592 6.58238 6.38929 6.20637 6.03295 7.20979 6.97130 6.74664 6.53482 7.801697.51523 7.24689 6.99525 4.79079 4.69590 4.60478 3.99061 5.35526 5.23054 5.11141 4.32551 5.86842 5.71220 5.56376 4.60459 6.33493 6.14612 5.96764 4.83716 6.75902 6.53705 6.32825 5.03097 11 10.47130 10.22218 9.98259 9.75206 9.53020 9.31661 9.11090 8.91272 8.72173 8.537638.360098.02358 12 11.36763 11.07112 10.78685 10.51421 10.25262 10.00155 9.76048 9.52892 9.30641 9.09254 8.88687 8.49867 13 12.25508 11.90751 11.57534 11.25776 10.95400 10.66333 10.38507 10.11858 9.86325 9.61852 9.38384 8.94269 14 13.13374 12.73153 12.34837 11.98318 11.63496 11.30274 10.98565 10.68285 10.39357 10.11708 9.85268 9.35765 15 14.00370 13.54338 13.10625 12.69091 12.29607 11.92052 11.56312 11.22283 10.89864 10.58965 10.29498 9.74547 7.71008 8.13896 8.53608 8.90378 9.24424 7.41766 7.80519 8.16073 8.48690 8.78615 7.14457 6.88923 6.65022 5.19247 7.49506 7.20652 6.93770 5.32706 7.81369 7.49236 7.19437 5.43922 8.10336 7.74987 7.42355 5.53268 8.36669 7.98187 7.62817 5.61057 16 14.86505 14.34323 13.84926 13.38138 12.93794 12.51741 12.11839 11.73955 11.37966 11.03758 10.71225 10.107919.55948 17 15.71787 15.13126 14.57771 14.05500 13.56110 13.09412 12.65230 12.23402 11.83777 11.46216 11.10590 10.44665 9.85137 18 16.56225 15.90765 15.29187 14.71220 14.16612 13.65132 13.16567 12.70719 12.27407 11.86461 11.47726 10.76322 10.12164 19 17.39827 16.67256 15.99203 15.35336 14.75351 14.18968 13.65930 13.15999 12.68959 12.24607 11.82760 11.05909 10.37189 20 18.22601 17.42617 16.67846 15.97889 15.32380 14.70984 14.13394 13.59329 13.08532 12.60765 12.15812 11.33560 10.60360 9.060698.60608 8.19087 7.81086 5.67547 9.31256 8.82371 8.37916 7.97 399 5.72956 9.54363 9.02155 8.54879 8.11963 5.77463 9.75563 9.20141 8.70162 8.24967 5.81219 9.95011 9.36492 8.83929 8.36578 5.84350 21 19.04555 18.16864 17.35143 16.58916 15.87747 15.21240 14.59033 14.00794 13.46221 12.95038 12.46992 11.59401 10.81815 10.12855 9.51356 8.96333 8.46944 5.86958 25 22.24339 21.03041 19.91393 18.88499 17.93554 17.05837 16.24696 15.49548 14.79864 14.15170 13.55036 12.46933 11.52876 10.70661 9.98474 9.34814 8.78432 5.93710 30 26.06579 24.37608 22.84438 21.45355 20.18845 19.03577 17.98371 17.02189 16.14107 15.33310 14.59072 13.27767 12.15841 11.19828 10.36961 9.65011 9.02181 5.97472 40 33.16303 30.36458 27.90259 25.73034 23.80822 22.10250 20.58448 19.22966 18.01704 16.92866 15.94907 14.26493 12.87858 11.72552 10.75696 9.93567 9.23303 5.99592

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four part should be ansered. Kindly take note of it.

Part 1

Finance lease

Lessee’s Application of classification criteria
Does the agreement specify that             ownership of the asset transfers             to the lessee?	No
Does the agreement contain a             bargain purchase option?	No
Is the lease term equal to 75%             or more of the expected                      economic life of the asset? (4/5 = 80%)	Yes
Is the present value of the             minimum lease payments equal             to or greater than 90% of the             fair value of the asset? (38855/(90%*42382)) = 102%)	Yes

Lessee’s calculation of the present value of minimum lease payments
Present value of periodic lease payments                      excluding executory costs of $3000 ((13000-3000)*3.53129)	35313
Plus: Present value of the lessee-guaranteed                     residual value (5000* 0.70843)	3542
Present value of lessee’s minimum lease payments	$38855
present value of $1: n=4, i=9% is 0.70843
present value of an annuity due of $1: n=4, i=9% is 3.53129

As the two of four criteria are met, it is classified as capital lease for Yard Art Landscaping and there is no buying option at the end of lease period, it is classified as finance lease

Part 2

amount that Yard Art would record as a right-of-use asset and a lease liability would be

$38855

Part 3

Sales-type lease

Lessor’s Application of classification crieteria
Does the agreement specify that             ownership of the asset transfers             to the lessee?	No
Does the agreement contain a             bargain purchase option?	No
Is the lease term equal to 75%             or more of the expected                      economic life of the asset? (4/5 = 80%)	Yes
Is the present value of the             minimum lease payments equal             to or greater than 90% of the             fair value of the asset? (44523 > /(90%*42382))	Yes

Lessor’s calculation of the present value of minimum lease payments
Present value of periodic lease payments                      excluding executory costs of $3000 ((13000-3000)*3.53129)	35313
Plus: Present value of the lessee-guaranteed                     residual value (13000* 0.70843)	9210
Present value of lessee’s minimum lease payments	$44523
present value of $1: n=4, i=10% is 0.68301
present value of an annuity due of $1: n=4, i=10% is 3.48685

As the two of four criteria are met, it is classified as capital lease for branch motors

Also, there is dealer’s profit, it is classified as sales-type lease

Dealer’s profit = fair value – book value = 42382-39000 = $3382

Part 4

Amount to be recovered (fair value)	42382
Less: Present value of the residual value (11000*0.68301)	(7513)
Amount to be recovered through periodic lease payments	34869
Lease payments at the beginning of each of the next four years (34869/3.48685)	10000
Plus: Executory costs	3000
Lease payments including executory costs	$13000
present value of $1: n=4, i=10% is 0.68301
present value of an annuity due of $1: n=4, i=10% is 3.48685