Describes the pattern of interest expense over the lease

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Reference no: EM132756444

Question - On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $36,000 for the truck. Its retail value is $42,342.

The lease agreement specified annual payments of $11,000 beginning December 31, 2018, the beginning of the lease, and at each December 31 through 2021. Branch Motors' interest rate for determining payments was 11%. At the end of the four-year lease term (December 31, 2022) the truck was expected to be worth $12,000. 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 Art's incremental borrowing rate is 10% 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 $11,000 lease payments.

Required - Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art. Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors.

Reference no: EM132756444

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