Exercise 15-31 Nonlease payments; lessor and lessee [LO15-2, 15-7]

On January 1, 2018, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 13% rate of return for providing long-term financing. The lease agreement specified:

1. Ten annual payments of $60,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026.
2. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $321,912.
3. The lease qualifies as a finance lease/sales-type lease.
4. A 10-year service agreement with Quality Maintenance Company was negotiated to provide maintenance of the equipment as required. Payments of $7,500 per year are specified, beginning January 1, 2018. NRC was to pay this cost as incurred, but lease payments reflect this expenditure.
5. A partial amortization schedule, appropriate for both the lessee and lessor, follows:

(FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
		(13% Outstanding balance)
				321,912
1/1/2018	52,500		52,500	269,412
12/31/2018	52,500	0.13 (269,412) = 35,024	17,476	251,936
12/31/2019	52,500	0.13 (251,936) = 32,752	19,748	232,188

Required: 1. Prepare the appropriate entries for the lessee related to the lease on January 1, 2018 and December 31, 2018. 2. Prepare the appropriate entries for the lessor related to the lease on January 1, 2018 and December 31, 2018.