On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending...

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 $824,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2018, will be $100,000. Negotiations led to the lessee guaranteeing a $140,000 residual value. Equal payments under the lease are $200,000 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 5% interest rate when calculating lease payments.

1. Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2018, to record the lease

-Record the beginning of the lease for Nguyen

-Record the beginning of the lease for Nevels

2. Prepare all appropriate entries for both Nguyen and Nevels on December 31, 2018, related to the lease

-Record the lease payment and interest expense for Nguyen

-Record the amortization expense for Nguyen

-Record the lease revenue and interest received by Nevels

Solutions

Expert Solution

First of all we need to calculate the fair value of lease to be recognized in the books of Lessor and Lessee.

Fair value of lease = Annual Payments*PVAF(5%, 4 yrs) + Guaranted Residual Value*PVF(5%,4 yrs)

= $200,000*3.54595 + $140,000*0.8227

= $709,190+$115,178 = $824,368

1) Journal entries to record the beginning of lease for Nguyen and Nevels is shown as follows:-

Journal Entries (Amount in $)

Date	Account Titles and Explanation	Debit	Credit
Jan.1, 2018	Right of use Asset	824,368
	Lease Payable		824,368
	(To record the lease payable in the books of Nguyen)
Jan.1, 2018	Lease Receivable	824,368
	Leased Asset		824,368
	(To record the lease receivable in the books of Nevels)

2) Journal Entries (Amount in $)

Date	Account Titles and Explanation	Debit	Credit
Dec.1, 2018	Lease Payable	158,782
	Interest Expense (824,368*5%)	41,218
	Cash		200,000
	(To record the lease payment in the books of Nguyen)
Dec.1, 2018	Amortization Expense (824,368/4 yrs)	82,437
	Right of use Asset		82,437
	(To record the amortization expenses in the books of Nguyen)
Dec.1, 2018	Cash	200,000
	Interest Income (824,368*5%)		41,218
	Lease Receivable		158,782
	(To record the lease receivable in the books of Nevels)

ekkarill92 answered 1 year ago

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