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: a. Ten annual payments of $62,000 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 NRC was $349,732. 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, 2018. 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.) Decrease in Balance Outstanding Balance Payments Effective Interest (11% Outstanding balance) 1/1/2018 12/31/2018 12/31/2019 53,500 53,500 53,500 0.11 (296, 232) 0.11 (275, 318) 349,732 296, 232 275,318 252,103 53,500 20,914 23, 215 = 32,586 30, 285 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

Answer
1) Lessee
Date	General Journal	Debit	Credit
01-01-2018	Leased asset	$    3,49,732
	To, Lease payable		$    3,49,732
	(To record Lease payable)
01/01/2018	Lease payable	$       53,500
	Prepaid maintenance	$         8,500
	To, Cash		$       62,000
	(To record prepaid maintenance)
31-12-2018	Lease payable	$       20,914
	Interest expense	$       32,586
	Maintenance expense	$         8,500
	To, Cash		$       62,000
	(To record interest expenses)
31/12/2018	Deprecation expense	$       34,973
	To, Accumulated depreciation (349,732/10)		$       34,973
	(To record Accumulated depreciation)
2 ) Lessor
01-01-2018	Lease receivable	$    3,49,732
	To, Equipment		$    3,49,732
	(To record Equipment)
01/01/2018	Cash	$       62,000
	To, Maintenance payable		$         8,500
	To, Lease receivable		$       53,500
	(To record maintencec payable)
31-12-2018	Cash	$       62,000
	To, Interest revenue		$       32,586
	To, Lease receivable		$       20,914
	To, Maintenance payable		$         8,500
	(To record interest revenue)