Question

On January 1, 2018, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 11% rate of return for providing long-term financing. The lease agreement specified:

1. Ten annual payments of $74,000 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 $424,908.
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 $9,000 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
		(11% Outstanding balance)
				424,908
1/1/2018	65,000		65,000	359,908
12/31/2018	65,000	0.11 (359,908) = 39,590	25,410	334,498
12/31/2019	65,000	0.11 (334,498) = 36,795	28,205	306,293

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

А в 1 Books of Lessee 2 Date General Journal Debit Credit 3 01-01-2018 Leased Equipment 424908 Lease Payable 424908) 6oo vane wn 65000 01-01-2018 Lease Payable Maintenance Expense Cash 9000 740001 10 11 12 13 14 15 12-31-2018 Interest Expense Lease Payable Prepaid Maintenance Cash 39590|| 25410 9000) 74000 42491 12-31-2018 Depreciation Expense Accumulated Depriciation 16 424910 17

17 18 Books Of Lessor 19 Date General Journal Debit Credit 20 01-01-2018 Lease Receivable 424908 21 Inventory of Equipment 424908 22 74000 23 24 25 26 01-01-2018 Cash Lease Receivable Maintenance Fee Payable 65000 9000 27 74000 28 12-31-2018 Cash Lease Receivable Maintenance Fee Payable Interest Revenue 29 25410 9000 39590 30 31 32 33

А B Credit wn 2 Date 3 43101 Books of Lessee Debit 424908 General Journal Leased Equipment Lease Payable =C3 6 43101 va Lease Payable Maintenance Expense Cash =D8-C7 9000 8 74000 10 2018 Interest Expense Lease Payable Prepaid Maintenance Cash 39590 25410 9000 12 13 14 =C10+011+C12 15 42491 2018 Depreciation Expense Accumulated Depriciation 42491 16 17

17 Credit 424908 18 Books Of Lessor 19 Date General Journal Debit 20 43101 Lease Receivable 424908 21 Inventory of Equipment 22 23 43101 Cash I=D25+D24 24 Lease Receivable 25 Maintenance Fee Payable 26 2018 Cash =D30+D29+D28 2D2D28 Lease Receivable 29 Maintenance Fee Payable 30 Interest Revenue 31 32 65000 9000 27 28 =C11 =C12 =C10