Chapter 15, Problem 15.24P

Lessee and lessor; lessee guaranteed residual value

• LO15–2, LO15–7

On January 1, 2018, Nguyen Electronics leased equipment from Nevels Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Nevels. The equipment cost Nevels $824,368 and has an expected economic life of five years. Nevels expects the residual value at December 31, 2021, will be $100,000. Negotiations led to the lessee guaranteeing a $140,000 residual value.

Equal payments under the lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Nguyen is aware that Nevels used a 5% interest rate when calculating lease payments.

Required:

1. Prepare the appropriate entries for both Nguyen and Nevels on January 1, 2018, to record the lease.

2. Prepare all appropriate entries for both Nguyen and Nevels on December 31, 2018, related to the lease.