Chapter 15, Problem 15.15P

Nonlease payments; lessor and lessee

• LO15–2, LO15–7

On January 1, 2018, Lesco Leasing leased equipment to Quality Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified:

a. Ten annual payments of $56,000 beginning January 1, 2018, the beginning of the lease and each December 31 thereafter through 2026.

b. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to Lesco was $322,741.

c. The lease qualifies as a finance lease/sales-type lease.

d. 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, 2018. Lesco was to pay this cost as incurred, but lease payments reflect this expenditure. Also included in the $56,000 payments is an insurance premium of $4,000 providing coverage for the equipment.

Required:

1. Prepare the appropriate entries for both the lessee and lessor related to the lease on January 1, 2018.

2. Prepare the appropriate entries for both the lessee and lessor related to the lease on December 31, 2018.