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
Payments Effective
Interest Decrease in
Balance Outstanding
Balance (12% Ã Outstanding balance) 403,080 1/1/13 58,100 58,100 344,980 12/31/13 58,100 0.12 (344,980 ) = 41,398 16,702 328,278 12/31/14 58,100 0.12 (328,278 ) = 39,393 18,707 309,571
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.
Required: Prepare the appropriate entries for both the lessee andlessor to record the second lease payment, executory costs, anddepreciation (straight line) on December 31, 2013. (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field. Enter your answers in wholedollars.)
1. Record the cash payment.
2. Record the depreciation expense.
3. Record the cash received.
Journal Accounts List:
No journal entry required
Accretion revenue
Accumulated depreciation
Airplanes
Amortization expense
Building
Cash
Cost of goods sold
Deferred gain on sale-leaseback
Deferred initial direct cost
Deferred profit
Deferred rent expense payable
Depreciation expense
Gain on sale-leaseback
Insurance premium payable
Interest expense
Interest payable
Interest receivable
Interest revenue
Inventory of equipment
Lease expense
Lease payable
Lease receivable
Lease revenue
Leased building
Leased equipment
Leased land
Leased property
Leasehold improvements
Loss on leased assets
Loss on residual value guarantee
Maintenance fee payable
Notes payable
Prepaid maintenance
Prepaid rent
Profit
Rent expense
Rent revenue
Residual asset
Right-of-use equipment
Sales revenue
Selling expense
Unearned miscellaneous revenue
Unearned rent revenue
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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Related questions
Exercise 15-19 Executory costs; lessor and lessee [LO15-5, 15-6,15-8, 15-9]
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. | Ten annual payments of $55,000 (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 10 yearswith 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 wasnegotiated 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 leasepayments reflect this expenditure. |
| e. | A partial amortization schedule, appropriate for both the lesseeand lessor, follows: |
| Payments | Effective Interest | Decreasein Balance | Outstanding Balance | |
| (12% Ã 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 lessorto record: |
| 1. | The lease at its inception. (If no entry is required fora particular transaction, select "No journal entry required" in thefirst account field. Enter your answers in wholedollars.) |
| 1. Record lease by lessee. 2. Record the cash payment. 3. Record lease by lessor. 4. Record the cash received. â2. the second lease payment and depreication straight line 1. record the cash payment 2. record depreciation 3. record cash received by lessor |
# Warren Co. recorded a right-of-use asset of $800,000 in a10-year Type A lease. The interest rate charged by the lessor was8%. Under the new ASU, the balance in the right-of-use asset aftertwo years will be:
#Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.
| Payment | Cash Payment | Effective Interest | Decrease in balance | Balance |
| 63,282 | ||||
| 1 | 10,000 | 10,000 | 53,282 | |
| 2 | 10,000 | 6,394 | 3,606 | 49,676 |
| 3 | 10,000 | 5,961 | 4,039 | 45,638 |
| 4 | 10,000 | 5,477 | 4,523 | 41,114 |
| 5 | 10,000 | 4,934 | 5,066 | 36,048 |
| 6 | 10,000 | 4,326 | 5,674 | 30,373 |
| 7 | 10,000 | 3,645 | 6,355 | 24,018 |
| 8 | 10,000 | 2,882 | 7,118 | 16,901 |
| 9 | 10,000 | ? | ? | ? |
| 10 | 10,000 | ? | ? | ? |
What would the lessee record as annual depreciation on the assetusing the straight-line method?
#XYZ Company leased equipment to West Corporation under a leaseagreement that qualifies as a capital lease to West but not as aresult of a bargain purchase option or a title transfer. Thepresent value of the asset is $600,000. The expected economic lifeof the asset is 10 years. The lease term is five years. Using thestraight-line method, what would West record as annualdepreciation?
# If the lessee and lessor use different interest rates toaccount for a capital lease, then:
Total expenses for the lessee will be different from thelessor's total revenues.
Total expenses for the lessee will equal the lessor's totalrevenues.
GAAP has been violated by at least one party.
The lessee will report more net income for the year.
##
Technoid Inc. sells computer systems. Technoid leases computersto Lone Star Company on January 1, 2016. The manufacturing cost ofthe computers was $12 million.
This noncancelable lease had the following terms:
⢠Lease payments: $2,466,754 semiannually; first payment at January1, 2016; remaining payments at June 30 and December 31 each yearthrough June 30, 2020.
⢠Lease term: five years (10 semiannual payments).
⢠No residual value; no bargain purchase option.
⢠Economic life of equipment: five years.
⢠Implicit interest rate and lessee's incremental borrowing rate:5% semiannually.
⢠Fair value of the computers at January 1, 2016: $20million.
Collectibility of the rental payments is reasonably assured, andthere are no lessor costs yet to be incurred.
Lone Star Company would account for this as:
A capital lease.
A direct financing lease.
A sales type lease.
An operating lease.
##
Refer to the following lease amortization schedule. The 10payments are made annually starting with the inception of thelease. Title does not transfer to the lessee and there is nobargain purchase option or guaranteed residual value. The asset hasan expected economic life of 12 years. The lease isnoncancelable.
| Payment | Cash Payment | Effective Interest | Decrease in balance | Balance |
| 63,282 | ||||
| 1 | 10,000 | 10,000 | 53,282 | |
| 2 | 10,000 | 6,394 | 3,606 | 49,676 |
| 3 | 10,000 | 5,961 | 4,039 | 45,638 |
| 4 | 10,000 | 5,477 | 4,523 | 41,114 |
| 5 | 10,000 | 4,934 | 5,066 | 36,048 |
| 6 | 10,000 | 4,326 | 5,674 | 30,373 |
| 7 | 10,000 | 3,645 | 6,355 | 24,018 |
| 8 | 10,000 | 2,882 | 7,118 | 16,901 |
| 9 | 10,000 | ? | ? | ? |
| 10 | 10,000 | ? | ? | ? |
What would be the outstanding balance after payment 10?
## Cady Salons leased equipment from Smith Co. on January 1,2016, in a Type B lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due at each January 1 beginning January 1, 2016. Following theguidance of the new ASU, the amortization of the right-of-use assetfor the reporting year ending December 31, 2016, would be:
## Karla Salons leased equipment from Smith Co. on July 1, 2016,in a Type A lease. The present value of the lease paymentsdiscounted at 10% was $80,000. Ten annual lease payments of $12,000are due each year beginning July 1, 2016. Smith Co. had constructedthe equipment recently for $66,000, and its retail fair value was$80,000.
Under the new ASU, what amount of interest revenue from the leaseshould Smith Co. report in its December 31, 2016, incomestatement?
### If the leaseback portion of a sale-leaseback transaction isclassified as an operating lease:
Any gain is deferred and recognized as a reduction of rentexpense.
Any gain is deferred and recognized as a reduction ofdepreciation.
Any gain is recognized at the lease's inception.
There can be no gain.
