Question

On January 1, 2021, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $844,309 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2024, will be $108,000. Negotiations led to the lessee guaranteeing a $156,000 residual value. Equal payments under the lease are $208,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Nguyen is aware that Nevels used a 6% interest rate when calculating lease payments. (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.) Required: 1. Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2021, to record the lease. 2. Prepare all appropriate entries for both Nguyen and Nevels on December 31, 2021, related to the lease. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2021, to record the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to the nearest whole dollar.) View transaction list Journal entry worksheet < 1 2 Record the beginning of the lease for Nguyen.

Answer 1

Answer:

First of all we need to calculate the fair value of lease to be recognized in the books of Lessor and Lessee.

Fair value of lease = Annual Payments*PVAF(6%, 4 yrs) + Guaranted Residual Value*PVF(6%,4 yrs)

= $208000*3.4651 + $156000*0.79209

= $720741+$123566 = $844307

1) Journal entries to record the beginning of lease for Nguyen and Nevels is shown as follows:-

Journal Entries (Amount in $)

Date	Account Titles and Explanation	Debit	Credit
Jan.1, 2021	Right of use Asset	844307
	Lease Payable		844307
	(To record the lease payable in the books of Nguyen)
Jan.1, 2021	Lease Receivable	844307
	Leased Asset		844307
	(To record the lease receivable in the books of Nevels)

2)   Journal Entries (Amount in $)

Date	Account Titles and Explanation	Debit	Credit
Dec.1, 2021	Lease Payable	157342
	Interest Expense (844307*6%)	50658
	Cash		208000
	(To record the lease payment in the books of Nguyen)
Dec.1, 2021	Amortization Expense (844307/4 yrs)	211077
	Right of use Asset		211077
	(To record the amortization expenses in the books of Nguyen)
Dec.1, 2021	Cash	208000
	Interest Income (844307*6%)		50658
	Lease Receivable		157342
	(To record the lease receivable in the books of Nevels)