Question

In: Accounting

On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending...

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 $824,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2018, will be $100,000. Negotiations led to the lessee guaranteeing a $140,000 residual value.

Equal payments under the lease are $200,000 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.

Solutions

Expert Solution

Calculation fair Value of lease as follows
Annual lease payment 200000
present value of annuity factor 5%, 4yr 3.54595
(a) 709190
Residual value 140000
Present value factor 5%, 4 yrs 0.8227
(b) 115178
Fair value of lease (a)+(b) 824368
1) Journal entries
Particulars Debit Credit
Right of use assets 824368
lease payable 824368
(to record lease payable in book of nguyen)
Lease receivable 824368
lease assets 824368
(to record lease receivable in book of Nevels)
2) Journal entries
Particulars Debit Credit
lease payable 158782
interest expenses 41218
cash 200000
(to record lease payment in books of nguyen)
amortization exp (824368/4) 206092
right of use assets 206092
(to record the amortization exp in the books of nguyen)
Cash 200000
interest income 41218
lease receivable 158782
(to record the lease receivable in books of nevels)

ekkarill92 answered 2 years ago
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