A 10-year service agreement with quality maintenance

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Reference no: EM13482530

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 on December 31, 2013.

 

Reference no: EM13482530

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