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

	Lessor			Lessee
	Nevels			Nguyen
Cost	843368		Payments	219000
Life	5 Yrs		EIR	6%
Residual	178000
PV of Minimum Lease payments:
Yr1	219000	0.943396	206603.77
Yr2	219000	0.889996	194909.22
Yr3	219000	0.839619	183876.62
Yr4	219000	0.792094	173468.51
			758858.13

	Payments	Principal paid	Interest paid	Lease Liability
Commencment
Yr1	219,000	173,469	45,531	585,389
Yr2	219,000	183,877	35,123	401,513
Yr3	219,000	194,909	24,091	206,604
Yr4	219,000	206,604	12,396	(0)
	St. line exp(A)	Int. (B)	Amortisation(A-B)	Right of Use
Commencment				758858
Yr1	219,000	45,531	173,469	585,389
Yr2	219,000	35,123	183,877	401,513
Yr3	219,000	24,091	194,909	206,604
Yr4	219,000	12,396	206,604	(0)

	Entries in books of Lessee
1/1/2018	Dr Right of Use - Asset a/c			758858
	Cr Lease Liability			758858
1/31/2018	Dr Interest Expense			45531
	Cr Lease Liability			45531
1/31/2018	Dr Lease Liability			219000
	Cr Bank			219000
1/31/2018	Dr Depreciation			151771.6
	Cr Right of Use - Asset			151771.6

PV of Net Investment in Lease
Yr1	219000	0.943396	206603.77
Yr2	219000	0.889996	194909.22
Yr3	219000	0.839619	183876.62
Yr4	397000	0.792094	314461.18
			899850.8

NIL	899850
Carrying value - PV of residual value	702375.3
Selling profit	197474.7

	Entries in books of Lessor
1/1/2018	Dr Lease receivable			899850
	Dr Guarantee Residual Value			140992
	Dr Cost og Goods Sold			702375
	Cr Asset			843368
	Cr Reveue			899850