Brady Leasing leases mechanical equipment to industrial consumers under sales$-$type leases that earn Brady a $10\%$ rate of return for providing long$-$term financing. A lease agreement with Patel 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 Brady was $$2,996,800.$ The lease qualifies as a finance lease to Patel. Maintenance of the equipment was contracted for through a $20-$year service agreement with Southwestern Service Company requiring $20$ annual payments of $$12,000$ beginning December $31,2024.$ Hazard insurance with Jefferson Insurance on the equipment required $$12,000$ of annual insurance premiums. Both companies use straight$-$line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. $($FV of $$1,$ PV of $$1,$ FVA of $$1,$ PVA of $$1,$ FVAD of $$1$ and PVAD of $$1)$

Required: Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December $31,2025,$ assuming that the lessee pays maintenance costs as incurred. The lessor pays insurance premiums as incurred. The lease agreement requires annual payments of $$320,000.$Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December $31,2025,$ assuming instead that the contract specifies that the lessor pays maintenance costs as incurred. The lessees lease payments were increased to $$332,000$ to include an amount sufficient to reimburse these costs. Prepare the appropriate journal entries for both the lessee and lessor to record the second lease payment and depreciation on December $31,2025,$ assuming instead that the lessees lease payments of $$332,000$ included $$12,000$ for hazard insurance on the equipment rather than maintenance. 

Answer rating: 100% (QA)

To prepare the journal entries for both the lessee Patel Construction and lessor Brady Leasing for the given scenarios we need to consider the lease p... View the full answer