Question

On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2018, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $843,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2018, will be $119,000. Negotiations led to the lessee guaranteeing a $178,000 residual value.

Equal payments under the lease are $219,000 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 6% 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

Accounting entries in books of Nguyen
1/1/2018	Lease equipment Account Dr	758,858
	Finance lease obligation		758,858
31/12/2018	Depreciation Account Dr	189,715
	Lease Equipment account		189,715
	(758858/4)
31/12/2018	Finance Lease obilgation account Dr	206,604
	Interest Account Dr	12,396
	To Cash/Bank		219,000
Accounting entries in books of Nevel
1/1/2018	Finance lease receivable Dr	758,858
	To Lease Equipment Account		758,858
31/12/2018	Cash Bank/ Ac Dr	219,000
	To Interest Income		12,396
	Finance lease receivable		206,604