Question
On December 31, 2021, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $39,000 for the truck. Its retail value is $49,355.
On December 31, 2021, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $39,000 for the truck. Its retail value is $49,355. The lease agreement specified annual payments of $15,000 beginning December 31, 2021, the beginning of the lease, and at each December 31 through 2024. Branch Motors interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2025) 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 Arts incremental borrowing rate is 9% and is unaware of Branchs 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 $15,000 lease payments.
1. Calculate the amount Yard Art Landscaping would record as a right-of-use asset and a lease liability.
2. Show how Branch Motors calculated the $15,000 annual lease payments.
Amount to be recovered (fair value) = _______
Lease payments at the beginning of the next four years = ______
3. Calculate the amount Branch Motors would record as sales revenue.
4. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2021.
a. Record the beginning of the lease for Yard Art. 12/31/2021
b. Record the lease payment for Yard Art. 12/31/2021
c. Record the beginning of the lease for Branch Motors. 12/31/2021
d. Record cash received by Branch Motors. 12/31/2021
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