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 $61,000 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 $346,464.
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 $8,000 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)
				346,464
1/1/2021	53,000		53,000	293,464
12/31/2021	53,000	0.11 (293,464) = 32,281	20,719	272,745
12/31/2022	53,000	0.11 (272,745) = 30,002	22,998	249,747

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:

1.)

Date	Accounts Titles and Explanation	Debit	Credit
Jan. 1, 2021	Right-of-use Asset	$346,464
	Lease Liability		$346,464
	(To record lease)
Jan. 1, 2021	Lease Liability	$53,000
	Cash		$53,000
	(To record lease payment)
Dec. 31, 2021	Lease Liability	$20,719
	Interest Expense	$32,281
	Cash		$53,000
	(To record lease payment)
Dec. 31, 2021	Amortization Expense ($346464/10)	$34,646.4
	Right-of-use Asset		$34,646.4
	(To record amortization)

2.)

Date	Accounts Titles and Explanation	Debit	Credit
Jan. 1, 2021	Lease Receivable	$530,000
	Sales Revenue		$530,000
	(To record lease payment)
Jan. 1, 2021	Cash	$53,000
	Lease Receivable		$53,000
	(To record cash received)
Dec. 31, 2021	Cash	$53,000
	Lease Receivable		$53,000
	(To record cash received)