Question

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.

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