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 12/31/202

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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)
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