Reference no: EM131025393

On January 1, 2013, NRC Credit Corporation leased equipment to Brand Services under a direct financing lease designed to earn NRC a 14% rate of return for providing long-term financing. The lease agreement specified:

 a. Twelve annual payments of $58,000 (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 $340,059.

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 $5,300 per year are specified, beginning January 1, 2013. NRC was to pay this executory cost as incurred, but lease payments reflect this expenditure.

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

	Payments			Effective Interest								Decrease in Balance			Outstanding Balance
(14% × Outstanding balance)
																340,059
1/1/13		52,700											52,700			287,359
12/31/13		52,700		0.14		(287,359	)	=		40,230			12,470			274,889
12/31/14		52,700		0.14		(274,889	)	=		38,484			14,216			260,673

Assume the contract specified that NRC (the lessor) was to pay, not only the $5,300 maintenance fees, but also insurance of $730 per year, and was to receive a $280 management fee for facilitating service and paying executory costs. The lessee’s lease payments were increased to include an amount sufficient to reimburse executory costs plus NRC’s 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.)