Question

In: Accounting

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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