In: Accounting
On December 31, 2021, Yard Art Landscaping leased a delivery
truck from Branch Motors. Branch paid $36,000 for the truck. Its
retail value is $105,145.
The lease agreement specified annual payments of $29,000 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 $7,000. 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 $29,000 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.)
9. Prepare the appropriate entries for both
Yard Art and Branch Motors on December 31, 2022.
10. Prepare the appropriate entries for both Yard
Art and Branch Motors on December 31, 2024 (the final lease
payment).
11. Prepare the appropriate entries for both Yard
Art and Branch Motors on December 31, 2025 (the end of the lease
term), assuming the truck is returned to the lessor and the actual
residual value of the truck was $2,000 on that date.