Question

On January 1, 2018, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified: Ten annual payments of $71,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $401,844. The lease qualifies as a finance lease/sales-type lease. 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, 2018. NRC was to pay this cost as incurred, but lease payments reflect this expenditure. 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) Payments Effective Interest Decrease in Balance Outstanding Balance (12% Outstanding balance) 401,844 1/1/2018 63,500 63,500 338,344 12/31/2018 63,500 0.12 (338,344) = 40,601 22,899 315,445 12/31/2019 63,500 0.12 (315,445) = 37,853 25,647 289,798 Required: 1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2018 and December 31, 2018. 2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2018 and December 31, 2018.

Answer 1