Question

On January 1, 2018, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 13% rate of return for providing long-term financing. The lease agreement specified:

Ten annual payments of $68,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026.

The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $380,163.

The lease qualifies as a finance lease/sales-type lease.

A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $6,000 per year are specified, beginning January 1, 2018. NRC was to pay this cost as incurred, but lease payments reflect this expenditure.

A partial amortization schedule, appropriate for both the lessee and lessor, follows:

(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.)

	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
		(13% Outstanding balance)
				380,163
1/1/2018	62,000		62,000	318,163
12/31/2018	62,000	0.13 (318,163) = 41,361	20,639	297,524
12/31/2019	62,000	0.13 (297,524) = 38,678	23,322	274,202

Required:
1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2018 and December 31, 2018.
2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2018 and December 31, 2018.

Answer 1

Answer: Requirement 1		(In the books of lessee)
	Date	Journal entries	Debit	Credit
	1-Jan	Lease equipment	$                          380,163
		Lease payable		$                                  380,163
		(To record Lease of equipment)
	1-Jan	Lease payable	$                            62,000
		Maintenance Expense	$                               6,000
		Cash		$                                    68,000
		(To record payament of installment)
	31-Dec	Interest expense	$                            41,361
		Lease payable	$                            20,639
		Prepaid maitenance	$                               6,000
		Cash		$                                    68,000
		(To record payament of installment)
	31-Dec	Depreciation Expense	$                            38,016
		Accumulated Depreciation		$                                    38,016
		($380,163/ 10 years)
		(To record depreciation expense )
Requirement 2		(In the books of lessor)
	Date	Journal entries	Debit	Credit
	1-Jan	Lease receivable	$                    380,163.00
		Inventory-Equipment		$                            380,163.00
		(To record Lease of equipment)
	1-Jan	Cash	$                      68,000.00
		Maintenance fee payable		$                                6,000.00
		Lease receivable		$                              62,000.00
		(To record payament of installment)
	31-Dec	Cash	$                      68,000.00
		Maintenance fee payable		$                                6,000.00
		Lease receivable		$                              20,639.00
		Interest revenue		$                              41,361.00
		(To record payament of installment)