ADMS 2610 Lecture Notes - Lecture 24: Complex Differential Form, Liability Insurance
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On January 1, 2013, NRC Credit Corporation leased equipment toBrand Services under a direct financing lease designed to earn NRCa 12% rate of return for providing long-term financing. The leaseagreement specified:
a. | Twelve annual payments of $64,000 (including executory costs)beginning January 1, 2013, the inception of the lease and eachDecember 31 thereafter through 2021. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
b. | The estimated useful life of the leased equipment is 12 yearswith no residual value. Its cost to NRC was $403,080. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
c. | The leasequalifies as a capital lease to Brand. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
d. | A 12-year service agreement with Quality Maintenance Company wasnegotiated to provide maintenance of the equipment as required.Payments of $5,900 per year are specified, beginning January 1,2013. NRC was to pay this executory cost as incurred, but leasepayments reflect this expenditure. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A partial amortization schedule, appropriate for boththe lessee and lessor, follows
Assume the contract specified that NRC (the lessor) wasto pay, not only the $5,900 maintenance fees, but also insurance of$790 per year, and was to receive a $340 management fee forfacilitating service and paying executory costs. The lesseeâs leasepayments were increased to include an amount sufficient toreimburse executory costs plus NRCâs fee.
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