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:
| a. |
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.
|
| b. |
The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $316,412.
|
| 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 $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.
|
| e. |
A partial amortization schedule, appropriate for both the lessee and lessor, follows:
|
|
Payments |
Effective
Interest |
Decrease in
Balance |
Outstanding
Balance |
| (12% × Outstanding balance) |
|
|
|
|
316,412 |
| 1/1/13 |
50,000 |
|
50,000 |
266,412 |
| 12/31/13 |
50,000 |
.12 (266,412) = 31,969 |
18,031 |
248,381 |
| 12/31/14 |
50,000 |
.12 (248,381) = 29,806 |
20,194 |
228,187 |
|
| Required: |
|
Prepare the appropriate entries for both the lessee and lessor to record:
1. The lease at its inception.
2.
|
The second lease payment and depreciation (straight line) on December 31, 2013.
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