Question

National Leasing leases equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term leases. National earns interest under these arrangements at a 10% annual rate.

The company leased production equipment it purchased on December 31, 2020 for $270,000 to a local company, Madison Inc. The six-year operating lease term commenced January 1, 2021, and the lease contract specified annual payments of $24,000 beginning December 31, 2021 and each December 31 through 2026. The machine's estimated useful life is 15 years with no estimated residual value.

Madison had the option to terminate the lease after four years. At the beginning of the lease, there was no reason to believe the lease would be terminated.

Required:

Round your answers to the nearest whole dollar amounts.

1.Prepare the appropriate journal entries for National Leasing from the beginning of the lease through the end of 2021.

2.At the beginning of 2022, there was a significant indication that Madison's economic incentive to terminate the lease had changed causing both companies to believe termination of the lease at the end of four years (three years remaining) is "reasonably certain". Prepare any appropriate entries for National Leasing at January 1, 2022, to reflect the change in the lease term.

3.Prepare the appropriate journal entries pertaining to the lease for National Leasing at December 31, 2022.

Answer 1