Question

On January 1, 2018, NRC Credit Corporation leased equipment to Brand 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:

1. Ten annual payments of $75,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026.
2. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $414,500.
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 $9,500 per year are specified, beginning January 1, 2018. 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
		(12% Outstanding balance)
				414,500
1/1/2018	65,500		65,500	349,000
12/31/2018	65,500	0.12 (349,000) = 41,880	23,620	325,380
12/31/2019	65,500	0.12 (325,380) = 39,046	26,454	298,926

Required:
1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2018 and December 31, 2018.
2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2018 and December 31, 2018.

Answer 1

	Lessee
1/1/2018	General Journal	Debit	Credit
	Leased asset	414500
	Lease payable		414500
	Lease payable	65500
	Prepaid maintenance	9500
	Cash		75000
31/12/2018	Lease payable	23620
	Interest expense	41880
	Maintenance expense	9500
	cash		75000
	Deprecation expense	41450
	Accumulated depreciation		41450
	414500/10
	Lessor
1/1/2018	Lease receivable	414500
	Equipment		414500
	Cash	75000
	Maintenance payable		9500
	Lease receivable		65500
31/12/2018	Cash	75000
	Interest revenue		41880
	Lease receivable		23620
	Maintenance payable		9500

75000-9500	65500
65500*6.32825	414500