On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:

a.

Twelve annual payments of $64,000 (including executory costs) beginning January 1, 2013, the inception of the lease and each December 31 thereafter through 2021.

b.

The estimated useful life of the leased equipment is 12 years with no residual value. Its cost to NRC was $403,080.

c.

The lease qualifies as a capital lease to Brand.

d.

A 12-year service agreement with Quality Maintenance Company was negotiated 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 lease payments reflect this expenditure.

A partial amortization schedule, appropriate for both the lessee and lessor, follows

	Payments			Effective Interest								Decrease in Balance			Outstanding Balance
(12% 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) was to pay, not only the $5,900 maintenance fees, but also insurance of $790 per year, and was to receive a $340 management fee for facilitating service and paying executory costs. The lessees lease payments were increased to include an amount sufficient to reimburse executory costs plus NRCs fee.

Required:

Prepare the appropriate entries for both the lessee and lessor to record the second lease payment, executory costs, and depreciation (straight line) on December 31, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

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