Question

On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 10% rate of return for providing long-term financing. The lease agreement specified the following:

1. Ten annual payments of $60,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029.
2. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $354,849.
3. The lease qualifies as a finance lease/sales-type lease.
4. A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $7,500 per year are specified, beginning January 1, 2021. NRC was to pay this cost as incurred, but lease payments reflect this expenditure.
5. A partial amortization schedule, appropriate for both the lessee and lessor, follows:

6. (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
   		(10% × Outstanding balance)
   				354,849
   1/1/2021	52,500		52,500	302,349
   12/31/2021	52,500	0.1 (302,349) = 30,235	22,265	280,084
   12/31/2022	52,500	0.1 (280,084) = 28,008	24,492	255,592

   
   Required:
   1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2021 and December 31, 2021.
   2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2021 and December 31, 2021.

Answer 1

Answer:

In the books of Lessee:

Date General journal Debit ($) Credit ($)

1/1/2021 Lease Equipment 354,849

Lease Payable 354,849

1/1/2021 Lease Payable 52,500

Maintenance Expense 7,500

Cash 60,000

12/31/2021     Interest Expense 30,235

Lease Payable 22,265

Prepaid Maintenance 7,500

Cash 60,000

12/31/2021     Depreciation Expense 35,485

Accumulated Depreciation 35,485

(354,849/10 years)

In the books of Lessor

1/1/2021 Lease Receivable 354,849

Inventory of Equipment 354,849

1/1/2021 Cash 60,000

Lease Receivable 52,500

Maintenance payable 7,500

12/31/2021 Cash 60,000

Lease Receivable 22,265

Maintenance payable 7,500

Interest Revenue    30,235