Question

On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 10% rate of return for providing long-term financing. The lease agreement specified the following:
Ten annual payments of $73,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to Lesco was $417,665.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 $7,000 per year are specified, beginning January 1, 2021. Lesco was to pay this cost as incurred, but lease payments reflect this expenditure. Also included in the $73,000 payments is an insurance premium of $6,000 providing coverage for the equipment. A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Decrease in Outstanding
Payments Effective Interest Balance Balance
(10% * Outstanding balance) 412,300
1/1/2021 61,000 351, 300
12/31/2021 61,000 0.1 (351,300) = 35, 130 325,430
12/31/2022 61,000 0.1 (325, 430) = 32,543 296, 973
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. Jan. 1, 2021

Dr Right-of-use Asset $417,665

Cr Lease Liability $417,665

Jan. 1, 2021

Dr Lease Liability 61,000

Cr Cash 61,000

Dec. 31, 2021

Dr Lease Liability $25,870

Dr Interest Expense 35, 130

Cr Cash 61,000

Dec. 31, 2021

Dr Amortization Expense $41,230

Cr Right-of-use Asset $41,230

2. Jan. 1, 2021

Dr Lease Receivable $610,000

Cr Sales Revenue $610,000

Jan. 1, 2021

Dr Cash $61,000

Cr Lease Receivable $61,000

Dec. 31, 2021

Dr Cash $61,000

Cr Lease Receivable $61,000

Explanation:

1. Preparation of the appropriate entries for the lessee related to the lease on January 1, 2021 and December 31, 2021.

Jan. 1, 2021

Dr Right-of-use Asset $417,665

Cr Lease Liability $417,665

(To record lease)

Jan. 1, 2021

Dr Lease Liability 61,000

Cr Cash 61,000

(To record lease payment)

Dec. 31, 2021

Dr Lease Liability $25,870

($61,000-35,130)

Dr Interest Expense 35, 130

Cr Cash 61,000

(To record lease payment)

Dec. 31, 2021

Dr Amortization Expense $41,230 (412,300/10)

Cr Right-of-use Asset $41,230

(To record amortization)

2. Preparation of the appropriate entries for the lessor related to the lease on January 1, 2021 and December 31, 2021.

Jan. 1, 2021

Dr Lease Receivable $610,000

Cr Sales Revenue $610,000

($61,000*10)

(To record lease payment)

Jan. 1, 2021

Dr Cash $61,000

Cr Lease Receivable $61,000

(To record cash received)

Dec. 31, 2021

Dr Cash $61,000

Cr Lease Receivable $61,000

(To record cash received)