Question

On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $845,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2021, will be $121,000. Negotiations led to the lessee guaranteeing a $182,000 residual value.

Equal payments under the lease are $221,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Nguyen is aware that Nevels used a 8% 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, 2018, to record the lease.
2. Prepare all appropriate entries for both Nguyen and Nevels on December 31, 2018, related to the lease.

Answer 1

1. Fair value of the lease = Annual lease payments * PVAF( 8%. 4 years) + Residual value * PV ( 8% , 4 year)

= 221,000 * 3.31213 + 182,000 * 0.73503

= 865,756 (rounded off to the nearest dollar)

In the books of Nguyen :

Date	Account Titles	Debit	Credit
Jan 1, 2018	Right of use asset	865756
	Lease Payable		865756

In the books of Nevels:

Date	Account Titles	Debit	Credit
Jan 1, 2018	Lease receivable	865756
	Leased Asset		865756

2.In the books of Nguyen :

Date	Account Titles	Debit	Credit
Dec 31, 2018	Lease Payable	151740
	Interest expense [865756*8%]	69260
	Cash		221000
Dec 31, 2018	Amortization expense- right of use asset	216439
	Right of use asset		216439
	[865756/4]

In the books of Nevels:

Date	Account Titles	Debit	Credit
Dec 31, 2018	Cash	221000
	Interest income		69260
	Lease Receivable		151740