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 $64,000 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 $392,223.
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 $4,000 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.) Or Use Intermediate Accounting table if not provided.

	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
		(11% × Outstanding balance)
				392,223
1/1/2021	60,000		60,000	332,223
12/31/2021	60,000	0.11 (332,223) = 36,545	23,455	308,768
12/31/2022	60,000	0.11 (308,768) = 33,964	26,036	282,732

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

Date	Accounts Titles and Explanation	Debit	Credit
Jan. 1, 2021	Right-of-use Asset	$392,223
	Lease Liability		$392,223
	(To record lease)
Jan. 1, 2021	Lease Liability	$60,000
	Cash		$60,000
	(To record lease payment)
Dec. 31, 2021	Lease Liability	$23,455
	Interest Expense	$36,545
	Cash		$60,000
	(To record lease payment)
Dec. 31, 2021	Amortization Expense	$39,222		($392,223/10)
	Right-of-use Asset		$39,222
	(To record amortization)
Date	Accounts Titles and Explanation	Debit	Credit
Jan. 1, 2021	Lease Receivable	$600,000
	Sales Revenue		$600,000
	(To record lease payment)
Jan. 1, 2021	Cash	$60,000
	Lease Receivable		$60,000
	(To record cash received)
Dec. 31, 2021	Cash	$60,000
	Lease Receivable		$60,000
	(To record cash received)