CHAPTER 15 Leases 911 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 $45,114. The lease agreement specified annual payments of $11,000 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 $15,000. 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 $11,000, but with a deductible equal to any amount paid by the lessee ($11,000 reduced by any amount paid by the lessee). Yard Art’s incremental borrowing rate is 9%. 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 $11,000 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. Required: 1. How should this lease be classified by Yard Art Landscaping (the lessee)? Why? 2. Calculate the amount Yard Art Landscaping would record as a leased asset and a lease liability. 3. How should this lease be classified by Branch Motors (the lessor)? Why? 4. Show how Branch Motors calculated the $11,000 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, 2016. 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, 2017. 10. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2019 (the final lease payment). 11. Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2020 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $4,000 on that date. You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2016. Your accounting group provided you the following information on the company’s debt: 1. On July 1, 2016, Moonlight Bay issued bonds with a face amount of $2,000,000. The bonds mature in 20 years and interest of 9% is payable semiannually on June 30 and December 31. The bonds were issued at a price to yield investors 10%. Moonlight Bay records interest at the effective rate. 2. At December 31, 2015, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $500,000. The annual payment is $60,000, payable each June 30. 3. On January 1, 2016, Moonlight Bay leased a building under a capital lease calling for four annual lease payments of $40,000 beginning January 1, 2016. Moonlight Bay’s incremental borrowing rate on the date of the lease was 11% and the lessor’s implicit rate, which was known by Moonlight Bay, was 10%. Required: Calculate interest expense for the year ended December 31, 2016. Bidwell Leasing purchased a single-engine plane for its fair value of $645,526 and leased it to Red Baron Flying Club on January 1, 2016. Terms of the lease agreement and related facts were: a. Eight annual payments of $110,000 beginning January 1, 2016, the inception of the lease, and at each December 31 through 2022. Bidwell Leasing’s implicit interest rate was 10%. The estimated useful life of the plane is eight years. Payments were calculated as follows: P 15–16 Lesseeguaranteed residual value; third-partyguaranteed residual value; unguaranteed residual value; executory costs; different interest rates for lessor and lessee ● LO15–3, LO15–5, LO15–8, LO15–9 ✮ P 15–17 Integrating problem; bonds; note; lease ● LO15–5 ✮ P 15–18 Initial direct costs; direct financing lease ● LO15–3, LO15–5, LO15–9 Amount to be recovered (fair value) $645,526 Lease payments at the beginning of each of the next eight years: ($645,526 5 5.86842*) $110,000 *Present value of an annuity due of $1: n 5 8, i 5 10%.
Spiceland_Inter_Accounting8e_Ch15
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