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 $841,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2021, will be $117,000. Negotiations led to the lessee guaranteeing a $174,000 residual value. Equal payments under the lease are $217,000 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 9% interest rate when calculating lease payments.

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

Ans:

Calculation fair value of lease as follows
Annual lease payment	$217,000
Present value of annuity factor( 9%,4 year)	3.23971
A)	703,017
Residual Value	$174,000
Present value factor (9%, 4 year)	0.708
B).	$123,192
Fair value of lease A+B	$826,209

1. Journal entries at January 1,2018

Particulars	Debit($)	Credit($)
right of use assets	826,209
Assets Payable		826,209
(to record lease payable in book of nguyen)
Lease receivables	826,209
Lease Assets		826,209
(to record lease receivable in books of nevels)

2. Journal entries at December 31,2018

Particulars	Debit($)	Credit($)
Lease payables	142642
Interest expenses	74358
Cash		217,000
( to record lease payment in books of nguyen)
Amortization expense (826209/4)	206552
right of use assets		206552
(to record amortization expense in books of nguyen)
Cash	217000
Interest income		74,358
Lease receivables		142,642
( to record the lease receivables in books of nevels)