On January 1, 2021, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 10% rate of return for providing long-term financing. The lease agreement specified the following: Ten annual payments of $66,000 beginning January 1, 2021, the beginning of the lease and each December 31 thereafter through 2029.
The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $412,300.
The lease qualifies as a finance lease/sales-type lease.
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, 2021. NRC was to pay this cost as incurred, but lease payments reflect this expenditure.
A partial amortization schedule, appropriate for both the lessee and lessor, follows:
Payments Decrease in Balance Outstanding Balance Effective Interest (10% * Outstanding balance) 1/1/2021 12/31/2021 12/31/2022 61,000 61,000 61,000 0.1 (351,300) = 35, 130 0.1 (325, 430) = 32,543 61,000 25,870 28,457 412,300 351, 300 325,430 296, 973
Required:
1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2021 and December 31, 2021.
2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2021 and December 31, 2021.