Question

Exercise 15-33 (Algo) Nonlease payments; lessor and lessee [LO15-2, 15-7]

On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 10% rate of return for providing long-term financing. The lease agreement specified the following:

1. Ten annual payments of $63,000 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 NRC was $364,987.
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 $9,000 per year are specified, beginning January 1, 2021. NRC was to pay this cost as incurred, but lease payments reflect this expenditure.
5. A partial amortization schedule, appropriate for both the lessee and lessor, follows:

(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.)

	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
		(10% × Outstanding balance)
				364,987
1/1/2021	54,000		54,000	310,987
12/31/2021	54,000	0.1 (310,987) = 31,099	22,901	288,086
12/31/2022	54,000	0.1 (288,086) = 28,809	25,191	262,895

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

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

1 Record lease by lessee. 2 Record the cash payment. 3 Record the cash payment. 4 Record amortization of the right-of-use asset.

Answer 1

LA Debit $364,987 credit $364,987 $54.000 $9000 Answer! 9. Date Particulars 1/1/20021 Leased equipment Alcdr To Lease payable 1/1/2001 Lease payable Alc dr maintenance expense Alcdr 1. To cash 18/31/2021 Interest Expense Aic dr Lease payable Alc dr prepaid maintainance AIC dr To cash 60131/2021 Depreciation Expense Ac Dr (364,987/toyears) To Accumulated elepreciation $63,000 $31,099 $24.901 $ 9000 $63,000 $364,99 $364,99 Q LE credit $364,987 Date particulars Debit 71/2021 Lease Receivable All dr $364,987 To Inventory of equipment 1/1/2001 Cash Alc dr I. $63,000 To Lease Recewable To maintainance fee payable 12/3/202) Cash Alc dr $23,000 To Lease Receivable To maintainance fee payable TO Interest Revenue $ 54,000 $9000 $22,901 $9000 $ 31,099