On January 1, 2011, 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. Ten annual payments of $55,000 (including executory costs) beginning January 1, 2011, the inception of the lease and each December 31 thereafter through 2019.
b. The estimated useful life of the leased equipment is 10 years with no residual value. Its cost to NRC was $316,412.
c. The lease qualifies as a capital lease to Brand.
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, 2011. 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:
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Required:
Prepare the appropriate entries for both the lessee and lessor to record:
1. The lease at its inception.
2. The second lease payment and depreciation (straight line) on December 31,2011.