On December 31, 2016, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $71,948.

The lease agreement specified annual payments of $18,500 beginning December 31, 2016, the inception of the lease, and at each December 31 through 2019. Branch Motors interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2020) the truck was expected to be worth $16,000. 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 $6,000. Guarantor Assurance Corporation was engaged to guarantee a residual value of $12,000, but with a deductible equal to any amount paid by the lessee ($12,000 reduced by any amount paid by the lessee). Yard Arts incremental borrowing rate is 8%.

A $1,000 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 $18,500 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)?

	Capital lease
	Capital lease: Direct financing lease
	Operating lease
	Capital lease: Sales-type lease

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.)

Amount: _____

3.	How should this lease be classified by Branch Motors (the lessor)?

	Capital lease
	Capital lease: Sales-type lease
	Operating lease
	Capital lease: Direct financing lease

4.	Show how Branch Motors calculated the $18,500 annual lease payments.

Lessor's Calculation of Lease Payments
Amount to be recovered (fair value)
Less: Present value of the residual value
Amount to be recovered through periodic lease payments	$0
Lease payments at the beginning of each of the next four years
Add: Executory costs
Lease payments including executory costs	$0

5.

Calculate the amount Branch Motors would record as sales revenue. (Round your intermediate calculations to the nearest dollar amount.)

Sales Rev: ______

6.	Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• Record the lease for Yard Art.
• Record the lease payment for Yard Art.
• Record the lease for Branch Motors.
• Record cash received by Branch Motors.