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
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 |
Related questions
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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Problem 15-3 Direct financing and sales-type lease; lessee andlessor [LO15-3, 15- 5, 15-6]
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones. Physicians'Leasing purchased a lithotripter from Rand for $2,000,000 andleased it to Mid-South Urologists Group, Inc., on January 1,2016. |
| LeaseDescription: | |||
| Quarterly leasepayments | $ | 130,516 âbeginning of eachperiod | |
| Lease term | 5 years (20 quarters) | ||
| No residual value;no BPO | |||
| Economic life oflithotripter | 5 years | ||
| Implicit interestrate and lessee's incremental borrowing rate | 12% | ||
| Fair value ofasset | $ | 2,000,000 | |
Collectibility of the lease payments is reasonably assured, andthere are no lessor costs yet to be incurred. |
| Required: |
| 1. | How should this lease be classified by Mid-South UrologistsGroup and by Physicians' Leasing? |
| 2. | Prepare appropriate entries for both Mid-South Urologists Groupand Physicians' Leasing from the inception of the lease through thesecond rental payment on April 1, 2016. Depreciation is recorded atthe end of each fiscal year (December 31). (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field.) |
| Mid-South Urologists Group(Lessee): |
| Physicians' Leasing(Lessor): |
| 3. | Assume Mid-South Urologists Group leased the lithotripterdirectly from the manufacturer, Rand Medical, which produced themachine at a cost of $1.7 million. Prepare appropriate entries forRand Medical from the inception of the lease through the secondlease payment on April 1, 2016. (If no entry is requiredfor a particular transaction, select "No journal entry required" inthe first account field.) |
