Question

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 $66,000 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 $412,300.
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. 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:

Payments Decrease in Balance Outstanding Balance Effective Interest (10% * Outstanding balance) 1/1/2021 12/31/2021 12/31/2022 61,000 61,000 61,000 0.1 (351,300) = 35, 130 0.1 (325, 430) = 32,543 61,000 25,870 28,457 412,300 351, 300 325,430 296, 973 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.

Answer 1

PVMLP Table 6, 10 payments @ 10% * $ 61,000

6.75902*$ 61,000 =$ 412,300 (rounded)

Here To calculate $ 66,0000 :

Annual payment - Maintenance expense

$ 66,000 - $ 5,000 = $ 61,000

Conditions :

1) Transfer of Title = NO

2) Bargain purchase option = NO

3) Lease Term Is greater than or equal to 75% of useful assets = Yes , It is 100 % ( 10 years / 10 years )

4) PVMLP greater than or equal to 90 % Fair market value (FMV) = Yes,

When using implicit interest rate then PVMLP = FMV

Therefor , this a capital lease and also finance lease , cost = PVMLP=FMV

Date	Payments	Effective interest	Decrease in Balance	Outstanding
		(10% * Outstanding Balance )		Balance
				$ 412,300
01-01-2021	$ 61,000		$ 61,000	$ 351,300 {412,300-61,000}
12/31/2022	$ 61,000	$ 35,130 {351,300*10% }	$ 25,870 {61,000 - 35,130 }	$ 325,430 {351,300-25,870}
12/31/2022	$ 61,000	$ 32,543 {325,430*10%}	$ 28,457    {61,000-32,543}	$ 296,973 {325,430-28,457}

Required 1 :
(Lessee point of view )
Date	General Journal	Debit	Credit
January 1,2021	Leased Asset	$ 412,300
	Leased payable		$ 412,300
	(To record leased Equipment )
January 1,2021	Leased payable ($66,000-$ 5000)	$ 61,000
	Prepaid maintenance	$ 5,000
	Cash		$ 66,000
	(To record lease payment at the time of agreement)
December 31,2021	Leased payable (66000-5000-35130)	$ 25,870
	Interest payable {351,300*10% }	$ 35,130
	Maintenance expense	$ 5,000
	Cash		$ 66,000
	(To record lease payment at the first year ended)

Required 2 :
(Lessor point of view )
Date	General Journal	Debit	Credit
January 1,2021	Lease receivable	$ 412,300
	Equipment		$ 412,300
	(To record leased Equipment )
January 1,2021	Cash	$ 66,000
	Maintenance payable		$ 5,000
	Lease receivable(66,000-5000)		$ 61,000
	(To record cash received for leased equipment)
December 31,2021	Cash	$ 66,000
	Interest revenue {351,300*10% }		$ 35,130
	Lease receivable(66000-5000-35130)		$ 35,130
	Maintenance payable		$ 5,000
	(To record cash received for leased equipment at first year ended)