Question

On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease...

On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 11% rate of return for providing long-term financing. The lease agreement specified the following:

  1. Ten annual payments of $67,000 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 $402,029.
  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 $5,500 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:

(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
(11% × Outstanding balance)
402,029
1/1/2021 61,500 61,500 340,529
12/31/2021 61,500 0.11 (340,529) = 37,458 24,042 316,487
12/31/2022 61,500 0.11 (316,487) = 34,814 26,686 289,801


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.

Homework Answers

Answer #1
Lessee
General Journal Debit Credit
1/1/2021 Leased Asset 402029
Lease payable 402029
(67000-5500)*6.53705
Lease payable 61500
Prepaid Maintenance 5500
Cash 67000
12/31/2021 Lease payable 24042
Interest expense 37458
Maintenance Expense 5500
Cash 67000
Depreciation Expense 40203
Accumulated Depreciation 40203
402029/10
Lessor
Date General Journal Debit Credit
1/1/2021 Lease receivable 402029
Equipment 402029
Cash 67000
Maintenance Payable 5500
Lease receivable 61500
12/31/2021 Cash 67000
Interest revenue 37458
Lease receivable 24042
Maintenance Payable 5500
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