Chapter 15, Problem 15.17P

Nonlease costs; lessor and lessee

• LO15–2, LO15–7

Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2018, the beginning of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $936,492. The lease qualifies as a finance lease to Branson. Maintenance of the equipment was contracted for through a 20-year service agreement with Midway Service Company requiring 20 annual payments of $3,000 beginning December 31, 2018. Progressive Insurance Company charges Branif $3,000 annually for hazard insurance coverage on the equipment. Both companies use straight-line depreciation or amortization.

Required:

Prepare the appropriate entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2019, under each of three independent assumptions:

1. 1. The lessee pays maintenance costs as incurred. The lessor pays insurance premiums as incurred. The lease agreement requires annual payments of $100,000.
2. 2. The contract specifies that the lessor pays maintenance costs as incurred. The lessee’s lease payments were increased to $103,000 to include an amount sufficient to reimburse these costs.
3. 3. The lessee’s lease payments of $103,000 included $3,000 for hazard insurance on the equipment rather than maintenance.