Brady Leasing leases mechanical equipment to industrial consumers under sales-ty

Question

Brady Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Brady a 10% rate of return for providing long-term financing. A lease agreement with Patel Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual alue. Its cost to Brady was $2,809,500. The lease qualifies as a finance lease to Patel. Maintenance of the equipment was contracted for through a 20-year service agreement with Southwestern Service Company requiing 20 annual payments of $9,000 beginning December 31, 2018. Hazard insurance with Jefferson Insurance on the equipment required $9,000 of annual insurance premiums. Both companies use straight-line depreciation or amortization. Requlred: 1. Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2019, under the lessee pays maintenance costs as incurred. The lessor pays insurance premiums as incurred. The lease agreement requires annual payments of $300,000 2. Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2019, under the contract specifies that the lessor pays maintenance costs as incurred. The lessee's lease payments were increased to $309,000 to include an amount sufficient to reimburse these costs 3. Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2019, under the lessee's lease payments of $309,000 included $9,000 for hazard insurance on the equipment rather than maintenance.

Explanation / Answer

Solution:

1. Journal Enteries in the books of lessor:

-at the time of second installment received by the lessor:-

Dec 31,2018. Cash Dr. 300000

To Lease Receivable.# 49050

To Finance Income. ## 250950

-payment of insurance premium:

Dec 31,2018. Insurance Expense Dr. 9000

To Cash. 9000

# cost of asset. 2809500

installment paid on Dec 31,2017. (300000)

balance of asset on Dec 31,2018. 2509500

interest. (10% of 2509500) 250950

installment. 300000

principal amount (300000-250950) 49050

Journal Enteries in the books of Lessee:

-at the time of making lease payment:

Dec 31,2018. Lease Liability. Dr. 49050

Interest Expense. Dr. 250950

To Cash. 300000

-depreciation chcharges on straight line method:

Dec 31,2018. Depreciation. Dr. 140475

To accumulated dep. 140475

Note:- cost of asset. 2809500

useful life. 20 years

depreciation. 2809500/20=140475

-Maintenance expenses incurred by lessee:

Dec 31,2018 Maintenance Expenses Dr. 9000

To cash. 9000

2.

Journal Enteries in the books of lessor:

-at the time of second installment received by the lessor:-

Dec 31,2018. Cash Dr. 309000

To Lease Receivable.# 49050

To Finance Income. ## 250950

To maintenance Expenses reimburse 9000

-payment of insurance premium:

Dec 31,2018. Insurance Expense Dr. 9000

To Cash. 9000

-payment of maintenance expenses

Dec 31,2018. Maintenance expenses reimburse Dr. 9000

To Maintenance expenses 9000

-transfer of maintenance expenses to maintenance reimburse account

Dec 31,2018. Maintenance expenses Dr. 9000

To Cash. 9000

# cost of asset. 2809500

installment paid on Dec 31,2017. (300000)

balance of asset on Dec 31,2018. 2509500

interest. (10% of 2509500) 250950

installment. 300000

principal amount (300000-250950) 49050

Journal Enteries in the books of Lessee:

-at the time of making lease payment:

Dec 31,2018. Lease Liability. Dr. 49050

Interest Expense. Dr. 250950

maintenance Expenses Dr. 9000

To Cash. 309000

-depreciation charges on straight line method:

Dec 31,2018. Depreciation. Dr. 140475

To accumulated dep. 140475

3.

Journal Enteries in the books of lessor:

-at the time of second installment received by the lessor:-

Dec 31,2018. Cash Dr. 309000

To Lease Receivable.# 49050

To Finance Income. ## 250950

To insurance expenses. 9000

Journal Enteries in the books of Lessee:

-at the time of making lease payment:

Dec 31,2018. Lease Liability. Dr. 49050

Interest Expense. Dr. 250950

insurance Expenses Dr. 9000

To Cash. 309000

-depreciation charges on straight line method:

Dec 31,2018. Depreciation. Dr. 140475

To accumulated dep. 140475

Maintenance expenses incurred by lessee:

Dec 31,2018 Maintenance Expenses Dr. 9000

To cash. 9000

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.