Question

On January 1, 2021, Lesco Leasing leased equipment to Quality Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified: (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.)

1. Ten annual payments of $56,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029.
2. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to Lesco was $322,741.
3. The lease qualifies as a finance lease/sales-type lease.
4. A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $5,000 per year are specified, beginning January 1, 2021. Lesco was to pay this cost as incurred, but lease payments reflect this expenditure. Also included in the $56,000 payments is an insurance premium of $4,000 providing coverage for the equipment.

Required:
1. Prepare the appropriate entries for both the lessee and lessor related to the lease on January 1, 2021.
2. Prepare the appropriate entries for both the lessee and lessor related to the lease on December 31, 2021.

Answer 1

10 payments @12% * 51000

6.32825*51000= 322741

The appropriate entries for both the lessee and lessor related to the lease on January 1, 2021.

Lessee:

Leased asset 322741

To Lease payable 322741

Lease payable 51,000

Prepaid maintenance 5,000

To Cash 56,000

Lessor:

Lease receivable 322741

To Equipment 322741

Cash 56,000

To Maintenance payable 5,000

To Lease receivable 51,000

The appropriate entries for both the lessee and lessor related to the lease on December 31, 2021.

Lessee:

Leased payable 19,031

Interests expense 31 969

Maintenance expense 5,000

To Cash 56,000

Depreciation expense 32274

To Accumulated depreciation 32274

(322741 ÷ 10)

Lessor:

Cash 56,000

To Interest revenue 31,969

To Lease receivable 19,031

To Maintenance payable 5,000