Branif Leasing leases mechanical equipment to industrial consumers under sales-type leases that earn Branif a 11% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments beginning December 31, 2024, 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 $1,104,911.
• 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 $2,000 beginning December 31, 2024.
• Progressive insurance Company charges Branif $2,000 annually for hazard insurance coverage on the equipment.
• Both companies use straight-line depreciation or amortization.
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1).
Required:
Prepare the appropriate entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2025, under each of three independent assumptions:
1. The lessee pays maintenance costs as incurred. The lessor pays insurance premiums as incurred. The lease agreement requires annual payments of $125,000.
2. The contract specifies that the lessor pays maintenance costs as incurred. The lessee's lease payments were increased to $127,000 to include an amount sufficient to reimburse these costs.
3. The lessee's lease payments of $127,000 included $2,000 for hazard insurance on the equipment rather than maintenance.
