Problem 15-18A Lessee-guaranteedresidual value; unguaranteed residual value;

different interest rates for lessor and lessee [LO15-3, 15-6, 15-7]

On December 31, 2018, Yard Art Landscaping leased a delivery truck from BranchMotors. Branch paid $39,000 for the truck. Its retail value is$42,382.The lease agreement specified annual payments of $10,000 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 usefullife of the truck is five yearswith no salvage value. Both companies use straight-lineamortization or depreciation.Yard Art guaranteed a residual value of $5,000. Yard Arts incremental borrowing rate is9% andis unaware of Branchs implicit rate.

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 anda lease liability.

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

4)Show how Branch Motors calculated the $10,000 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 ofinterest expense overthe lease term for Yard Art.

8)Prepare an amortization schedule that describes the pattern ofinterest revenue overthe 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 31,2022 (the end of the lease term), assuming the truck is returned to the lessor and theactual residual value of the truck was $3,000 on that date.