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

Answer:
Requirement 1		(In the books of lessee)
	Date	Journal entries	Debit	Credit
	1-Jan	Lease equipment	$                          899,851
		Lease payable		$                                  899,851
		(To record Lease of equipment)
		(In the books of lessor)
	Date	Journal entries	Debit	Credit
	1-Jan	Lease receivable	$                    899,850.80
		Inventory-Equipment		$                            899,850.80
		(To record Lease of equipment)
Requirement 2		(In the books of lessee)
	31-Dec	Interest expense	$                            53,991		($899,851*6%)
		Lease payable	$                          165,009		($219,000-$53,991)
		Cash		$                                  219,000
		(To record payament of installment)
	31-Dec	Depreciation Expense	$                          224,963
		Accumulated Depreciation		$                                  224,963
		($899,851/ 4 years)
		(To record depreciation expense )
		(In the books of lessor)
	31-Dec	Cash	$                    219,000.00
		Lease receivable		$                                  165,009	($219,000-$53,991)
		Interest revenue		$                                    53,991	($899,851*6%)
		(To record payament of installment)
		Work Note:
		Annual lease payment	$                    219,000.00
		PV annuity@ 6% for 4 years	$                                 3.47
		Present Value of lease payment	$                    758,858.13
	Add:	Present value of gauranty residual value	$                    140,992.67	($178,000*0.7921)
		Present Value of lease equipment	$                    899,850.80