Exercise 15-19 Executory costs; lessor and lessee [LO15-5, 15-6, 15-8, 15-9] On
ID: 2423139 • Letter: E
Question
Exercise 15-19 Executory costs; lessor and lessee [LO15-5, 15-6, 15-8, 15-9]
On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:
Ten annual payments of $55,000 (including executory costs) beginning January 1, 2013, the inception of the lease and each December 31 thereafter through 2021.
The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $316,412.
The lease qualifies as a capital lease to Brand.
A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $5,000 per year are specified, beginning January 1, 2013. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.
A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Prepare the appropriate entries for both the lessee and lessor to record:
The lease at its inception. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
1.
Record lease by lessee.
2.
Record the cash payment.
3.
Record lease by lessor.
4.
Record the cash received.
2. the second lease payment and depreication straight line
On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:
Explanation / Answer
In the books of Brand Services (Lessee) Journal Entries Date Particulars Debit Credit 01/01/2013 Equipment 316412 NRC Credit Corporation 316412 (Equipment taken on lease which is treated as Capital lease) 01/01/2013 Euipment maintenance 5000 NRC Credit Corporation 5000 (Executory cost) 01/01/2013 NRC Credit Corporation 55000 Cash 55000 (Cash payment) 31/12/2013 Euipment maintenance 5000 NRC Credit Corporation 5000 (Executory cost) 31/12/2013 NRC Credit Corporation 23031 Finance cost (Interest) 31969 cash 55000 (Cash payment) 31/12/2013 Depreciation 31641.2 Accumulated depreciation 31641.2 (Depreciation calculated- useful life is 10 years & cost - $316412) 31/12/2014 Euipment maintenance 5000 NRC Credit Corporation 5000 (Executory cost) 31/12/2014 NRC Credit Corporation 25194 Finance cost (Interest) 29806 cash 55000 31/12/2014 Depreciation 31641.2 Accumulated depreciation 31641.2 (Depreciation calculated- useful life is 10 years & cost - $316412) In the books of NRC Credit Corporation (Lessor) Journal Entries Date Particulars Debit Credit 01/01/2013 Brand Services 316412 Equipment 316412 01/01/2013 Brand Services 5000 Quality Maintenance Company 5000 (Maintenance charges of equipment) 01/01/2013 Cash 55000 Brand Services 55000 (Cash received) 01/01/2013 Quality Maintenance Company 5000 cash 5000 (Maintenance charges of equipment paid) 31/12/2013 Brand Services 5000 Quality Maintenance Company 5000 (Maintenance charges of equipment) 31/12/2013 Brand Services 31969 Interest revenue 31969 (Interest receivable) 31/12/2013 Cash 55000 Brand Services 55000 (Cash received) 01/01/2014 Quality Maintenance Company 5000 cash 5000 (Maintenance charges of equipment paid) 31/12/2014 Brand Services 5000 Quality Maintenance Company 5000 (Maintenance charges of equipment) 31/12/2014 Brand Services 29806 Interest revenue 31969 (Interest receivable) 31/12/2014 Cash 55000 Brand Services 55000 (Cash received) 01/01/2015 Quality Maintenance Company 5000 cash 5000 (Maintenance charges of equipment paid)
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