Question

On January 1, 2018, 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: a. Ten annual payments of $56,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026. b. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to Lesco was $322,741. c. The lease qualifies as a finance lease/sales-type lease. d. 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, 2018. 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, 2018. 2. Prepare the appropriate entries for both the lessee and lessor related to the lease on December 31, 2018.

Answer 1

Lessee treats it as a finance lease while the lesson beat it as sales type lease I PV o lease payment. - $51000x 6.243 - $318393 Lesson's Journal entry to record het investment in lease on 01/01/2018 NIL-Lease Recenable 3 18393 Selling loss on lease 4348 pp & E 322742

Canh $56000 TO NIL Lease Recerah eve Recevable $51000 $5000 To Non leae Thcome I Jle on 31/12/18 NIL-tease recevable $32037 . Interest income $32087 (318393 - 51000) X 12% For lessee J16 on olloll 18 Non lease expense $ 5000 Right of use Asset 18 18393 Lease liability $267393 Cash $ 56000

tle on 31/12/18. Interest expense $32087 Lease tabelity $32087 Depreciation $31840 Right ouse Alset. $31840 Notet The contact includes a single lease component, the right to we equipment . $56000 includes a non lease component $5000 for service where al $4000 is charged over all 10 yeau as a part of leave payment hence only $ 4000 included in measurement of lease leabilir & & 5000 changed as expense.