On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services un
ID: 2485707 • Letter: O
Question
On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 15% rate of return for providing long-term financing. The lease agreement specified:
Ten annual payments of $74,000 (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 $387,273.
A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $6,900 per year are specified, beginning January 1, 2013. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.
e. A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Assume the contract specified that NRC (the lessor) was to pay, not only the $6,900 maintenance fees, but also insurance of $890 per year, and was to receive a $440 management fee for facilitating service and paying executory costs. The lessee’s lease payments were increased to include an amount sufficient to reimburse executory costs plus NRC’s fee.
Prepare the appropriate entries for both the lessee and lessor to record the second lease payment, executory costs, and depreciation (straight line) on December 31, 2013. (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 the cash payment.
2.
Record the depreciation expense.
3.
Record the cash received.
a.Ten annual payments of $74,000 (including executory costs) beginning January 1, 2013, the inception of the lease and each December 31 thereafter through 2021.
b.The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $387,273.
c. The lease qualifies as a capital lease to Brand. d.A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $6,900 per year are specified, beginning January 1, 2013. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.
e. A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Payments EffectiveInterest Decrease in
Balance Outstanding
Balance (15% × Outstanding balance) 387,273 1/1/13 67,100 67,100 320,173 12/31/13 67,100 0.15 (320,173 ) = 48,026 19,074 301,099 12/31/14 67,100 0.15 (301,099 ) = 45,165 21,935 279,164
Assume the contract specified that NRC (the lessor) was to pay, not only the $6,900 maintenance fees, but also insurance of $890 per year, and was to receive a $440 management fee for facilitating service and paying executory costs. The lessee’s lease payments were increased to include an amount sufficient to reimburse executory costs plus NRC’s fee.
Required:Prepare the appropriate entries for both the lessee and lessor to record the second lease payment, executory costs, and depreciation (straight line) on December 31, 2013. (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 the cash payment.
2.
Record the depreciation expense.
3.
Record the cash received.
Explanation / Answer
PVMLP: 10 payments @ 15% x $50,000 5.77158 x $67,100 = $387273 Criteria: 1. Title transfer? No 2. Bargain purchase option? No 3. Lease term 75% of useful life? Yes, it is 100% (10 ÷ 10) 4. PVMLP 90% FMV? Yes. When using the implicit interest rate, the PVMLP = FMV. Therefore, this is a capital lease. In a direct financing lease, cost =PVMLP = FMV Part 1. Books of lessee Leased Assets Dr. 387,273 To Lease Payable 387,273 Lease Payable Dr. 67,100 Prepaid Maint. Dr. 6,900 To Cash 74,000 Books of Lessor: Lease receivable Dr. 387,273 To Equipment 387,273 Cash Dr. 74,000 To Maint. Payable 6,900 To Lease Receivables 67,100 Part 2. Record the Entry of Dep. Books of lessee Dep. Exp. Dr. 38,727 To accumulated Dep. 38,727 Books of lessor No Entry Part 3. Books of lessee Leased Payable Dr. 19074 Interest Exp. Dr. 48026 Maint exp. Dr. 6900 To Cash 74000 Books of lessor Cash Dr. 74000 To Interest Revenue 48026 To Lease Receivables 19074 To maint. Payable 6900
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