Exercise 15-19
On January 2, 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:
payments
y
of $55,000
,
(including
(
g executory
y costs))
a. Ten annual p
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
g
to provide
p
maintenance of the equipment
q p
as required.
q
was negotiated
Payments of $5,000 per year are specified, beginning January 1,
2013. NRC was to pay this executory cost as incurred, the lease
payments reflect this expenditure.
e. A partial amortization schedule, appropriate for both the lessee and
lessor is given through 12/31/14.
© Dr. Chula King
All Rights Received
Exercise 15-19 (continued)
PVMLP: Table 6, 10 payments @ 12% x $50,000
6.32825 x $50,000 = $316,412
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
© Dr. Chula King
All Rights Received
1
Exercise 15-19 (continued)
Part 1: Prepare the appropriate entries for both the lessee and lessor to
record the lease at its inception.
Lessee:
Leased asset
316,412
Lease payable
316 412
316,412
Lease payable
50,000
Prepaid maintenance
5,000
Cash
55,000
Lessor:
Lease receivable
Equipment
Cash
Maintenance payable
Lease receivable
316,412
316,412
55,000
5,000
50,000
© Dr. Chula King
All Rights Received
Exercise 15-19 (continued)
Part 2: Prepare the appropriate entries for both the lessee and lessor to record
second payment and depreciation (straight-line) on December 31, 2013
Lessee:
Leased payable
18,031
Interests expense
31 969
31,969
Maintenance expense
5,000
Cash
55,000
Depreciation expense
31,641
Accumulated depreciation
31,641
(316,412 ÷ 10)
Lessor:
Cash
55,000
Interest revenue
31,969
Lease receivable
18,031
Maintenance payable
5,000
© Dr. Chula King
All Rights Received
2