Question

Nace Manufacturing Company (Use for Problems 8-12) Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. Problem 8 What is the proper classification of the lease to Nace? Problem 9 What is the amount of the lease liability recorded by Nace at the lease's commencement? Problem 10 What is the value of the right-of-use asset to Nace at the lease's commencement? Problem 11 Based on the above information, prepare an amortization table for the Nace Manufacturing's lease liability. Payment Interest Reduction Balance Commencement 1-Jan-19 31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24 31-Dec-25 31-Dec-26 31-Dec-27 Problem 12 Based on the above information, prepare Nace Manufacturing's journal entries at the commencement of the lease, January 1 and December 31, 2019 payments, and amortization of the right-of-use asset.

Answer 1

Answer 8

What is the proper classification of the lease to Nace?

Lease classified to Nace is Capital lease. (Capital lease is also known as Finance Lease) (Here, Lease period = 100% of Equipment) (Hint: Lease period is more than 75% of Useful life of assets.)

Answer 9

Date	Payment No.	payment	Discount rate@11%	Present value
Jan 1, 2019	1	$          4,000	1.00000	$         4,000.00
Dec 31, 2019	2	$          4,000	0.90090	$         3,603.60
Dec 31, 2020	3	$          4,000	0.81162	$         3,246.49
Dec 31, 2021	4	$          4,000	0.73119	$         2,924.77
Dec 31, 2022	5	$          4,000	0.65873	$         2,634.92
Dec 31, 2023	6	$          4,000	0.59345	$         2,373.81
Dec 31, 2024	7	$          4,000	0.53464	$         2,138.56
Dec 31, 2025	8	$          4,000	0.48166	$         1,926.63
Dec 31, 2026	9	$          4,000	0.43393	$         1,735.71
Dec 31, 2027	10	$          4,000	0.39092	$         1,563.70
Lease liability				$             26,148

Answer 10

Lease liability				$             26,148
Add: Initial direct cost				$               1,000
Value of the right to use assets				$             27,148

Initial direct cost incurred by lease to negotiate the lease agreement should be capitalized. Initial direct cost incurred by lease to negotiate the lease agreement = 1000

Answer 11

Lease amortization table - lessee
Date	Beginning balance of lease payable	Lease payment	Interest expense (beginning balance of lease payable *11% )	Reduction in lease payable (lease payment - interest expense)	Ending balance of lease payable (beginning balance of lease payable - reduction in lease payable)
Jan 1, 2019	$         26,148	$                4,000		$                    4,000	$                                     22,148
Dec 31, 2019	$         22,148	$                4,000	$                         2,436	$                    1,564	$                                     20,584
Dec 31, 2020	$         20,584	$                4,000	$                         2,264	$                    1,736	$                                     18,849
Dec 31, 2021	$         18,849	$                4,000	$                         2,073	$                    1,927	$                                     16,922
Dec 31, 2022	$         16,922	$                4,000	$                         1,861	$                    2,139	$                                     14,784
Dec 31, 2023	$         14,784	$                4,000	$                         1,626	$                    2,374	$                                     12,410
Dec 31, 2024	$         12,410	$                4,000	$                         1,365	$                    2,635	$                                       9,775
Dec 31, 2025	$           9,775	$                4,000	$                         1,075	$                    2,925	$                                       6,850
Dec 31, 2026	$           6,850	$                4,000	$                            754	$                    3,246	$                                       3,604
Dec 31, 2027	$           3,604	$                4,000	$                            396	$                    3,604	$                                                0

Answer 12

Journal entries
Date	General Journal	Debit	Credit
Jan 1, 2019	Right of use Asset	27,148
	Lease liability		26,148
	Cash		1,000
	(To record the lease)
Jan 1, 2019	Lease Liability	4,000
	Cash		4,000
	(To record the lease payment.)
Dec 31, 2019	Interest expense	$                2,436
	Lease Liability	$                1,564
	Cash		$                         4,000
	(To record the lease payment.)
Dec 31, 2019	Amortization Expense	2,715
	Right-of-Use Asset		2,715
	(To record amortization of Right-of-Use Asset) (27148/10)