Question

Required 1

On January 1, 2021, 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 the following: a. Ten annual payments of $62,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029. b. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $338,561. 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 $8,500 per year are specified, beginning January 1, 2021. NRC was to pay this cost as incurred, but lease payments reflect this expenditure. e. 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 Decrease in Balance Outstanding Balance Effective Interest (12% x Outstanding balance) 1/1/2021 12/31/2021 12/31/2022 53,500 53,500 53,500 338,561 285,061 265,768 244,160 53,500 19,293 21,608 0.12 (285,061) = 34,207 0.12 (265,768) = 31,892 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.

Journal entry 1 - Record lease by lessee.

Journal entry 2 - Record the cash payment January 1, 2021

Journal entry 3 -Record the cash payment December 31, 2021

Journal entry 4 -Record amortization of the right-of-use asset on December 31, 2021

Required 2

Journal entry 1 - Record lease by lessor.

Journal entry 2 - Record the cash received (include maintenance fee accrual)

Journal entry 3 -Record cash received by lessor

Answer 1

37 Debit Credit 35 Required 1 36 Date Account title & explanation 38 2021 1-Jan Leased Equipment Lease Payable (TO record lease by lessee) 338,561 338,561 53,500 8,500 1-Jan Lease Payable Maintenance expense Cash (To record cash payment) 62,000 31-Dec Interest expense Lease Payable Prepaid maintenance Cash (To record the cash payment December 31, 2021) 34,207 19,293 8,500 62,000 33,856 31-Dec Depreciation expense (338561/10) Accumulated Depreciation (To record depreciation expense) 33,856

Required 2 60 Debit Credit 62 Date Account title & explanation 2021 1-Jan Lease Receivable Inventory of Equipment (To record lease by lessor) 338,561 338,561 62,000 1-Jan Cash Maintenance Fee Payable Lease Receivable (To record cash received (include maintenance fee accrual) 8,500 53,500 62,000 31-Dec Cash Maintenance Fee Payable Lease Receivable Interest Revenue (To record cash received by lessor) 8,500 19,293 34,207