Nagy Corp., an equipment dealer leased equipment to Pace

Nagy Corp., an equipment dealer leased equipment to Pace Industries on May 1, 2021.  The fair value of the equipment was $370,000 (cost $275,000) and Nagy requires 7 equal annual payments of $64,000 starting on May 1, 2021.  Also, Nagy structured the lease with an implicit return that is known to Pace. The equipment is expected to have a useful life of 7 years with no residual value.  There are no provisions for a purchase option.  The equipment will not be returned to Nagy at the end of the lease.

Both firms’ financial reporting periods end of December 31.  The following lease amortization schedule – suitable for both parties – has been prepared:

Instructions

1. Prepare the journal entries for Nagy at May 1, 2021 and December 31, 2021 assuming that no interim adjusting entries are recorded.

2. Assume that Pace also paid $30,000 of initial direct lease costs upon signing the lease. Prepare the journal entries for Pace at May 1, 2021 and December 31, 2021 assuming that no interim adjusting entries are recorded.