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 $839,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2021, will be $115,000. Negotiations led to the lessee guaranteeing a $170,000 residual value.

Equal payments under the lease are $215,000 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 5% 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

Journal Entries (Amount in $) in books of Nguyen & Nevels)
Date	Account Titles and Explanation	Debit $	Credit$
Jan.1, 2018	Right of use Asset	856,990
	Lease Payable		856,990
	(To record the lease payable in the books of Nguyen)
Jan.1, 2018	Lease Receivable	856,990
	Leased Asset		856,990
	(To record the lease receivable in the books of Nevels)

Journal Entries (Amount in $) in books of Nguyen & Nevels)
Date	Account Titles and Explanation	Debit $	Credit $
Dec.31, 2018	Lease Payable (215000-42850)	172,151
	Interest Expense (856990*5%)	42,850
	Cash		215,000
	(To record the lease payment in the books of Nguyen)
Dec.31, 2018	Amortization Expense (856990/4 yrs)	214,248
	Right of use Asset		214,248
	(To record the amortization expenses in the books of Nguyen)
Dec.31, 2018	Cash	215,000
	Interest Income (856990*5%)		42,850
	Lease Receivable		172,150
	(To record the lease receivable in the books of Nevels)

Computation of Fair Value of Lease
Annual Payments*PVAF(5%, 4 yrs) ($215000*3.54595)	$762,379
Guaranted Residual Value*PVF(5%,4 yrs) (115000*0.8227)	$94,611
Total Fair Value of Lease	$856,990