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:
1. Ten annual payments of $73,000 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 Lesco was $417,665.
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 $7,000 per year are specified, beginning January 1, 2021. Lesco was to pay this cost as incurred, but lease payments reflect this expenditure.
5. Also included in the $73,000 payments is an insurance premium of $6,000 providing coverage for the equipment.
Payments Effective Interest (11% × Outstanding balance) Decrease in Balance 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:
a. Prepare the appropriate entries for the lessee related to the lease on January 1, 2021 and December 31, 2021.
b. Prepare the appropriate entries for the lessor related to the lease on January 1, 2021 and December 31, 2021.
Answers: 3
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On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-...
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