Question

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2019, Hayes Corp. leases
trailers to Lester Company under a six-year noncancelable lease agreement. The following
information about the lease and the trailers is provided:
1. Equal annual payments that are due on December 31 each year provide Hayes Corp. with
an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288).
2. Titles to the trailers pass to Lester at the end of the lease.
3. The fair value of trailers is AED 800,000. The cost of each trailer to Hayes Corp. is AED 750,000.
Each trailer has an expected useful life of eight years.
4. Collectibility of the lease payments is reasonably predictable and there are no important
uncertainties surrounding the amount of costs yet to be incurred by Hayes Corp.
Instructions
(a) What type of lease is this for the lessor and lessee? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. and Lester Company for the first two years.
(d) Prepare the journal entries for Hayes Corp. and Lester Company for 2019 and 2020 to record the lease agreement,
the receipt of the lease rentals, and the recognition of income (assume the use of a
straight-line method and round all amounts to the nearest dollar).

(e) The section relating to the lease transactions (in the balance sheet) at the end of the second year for Hayes Corp. and Lester Company

Answer 1

Answer-(a):

This is a capital lease to the lessee since the NPV of the lease payment equals the assets fair value.

This is a capital lease to the lessor because collectibility of the lease payments is reasonably predictable,
there are no important uncertainties surrounding the costs yet to be incurred by the lessor, and the NPV
of the lease payment equals the assets fair value. Since the fair value (AED800,000) of the asset exceeds
the lessor’s cost (AED750,000), the lease is a sales-type lease.

Answer-(b):

Annnual lease payment = AED800,000 / 4.62288 = AED173,052.30

Answer-(c):
Date	Opg Bal.	Lease Rent	Interest Income	Reduction in lease receivable	Closing Bal.
(1)	(2)	(3)	(4) = (2) × 8%	(5) = (3) - (4)	(6) = (2) - (5)
Jan.01 2019	800000		0	0	800000
Dec.31 2019	800000	173052.3	64000	109052	690948
Dec.31 2020	690948	173052.3	55276	117776	573171
Dec.31 2023	573171	173052.3	45854	127199	445973
Dec.31 2024	445973	173052.3	35678	137374	308598
Dec.31 2025	308598	173052.3	24688	148364	160234
Dec.31 2026	160234	173052.3	12819	160234	0

Answer-(d):
Date	General Journal	Debit (AED)	Credit (AED)
1/1/2019	Lease receivable	800,000
	Cost of goods sold	750,000
	Sales revenue		800,000
	Inventory		750,000
12/31/2019	Cash	173,052
	Lease receivable		173,052
12/31/2019	Interest receivable	64,000
	Interest revenue		64,000
12/31/2020	Cash	173,052
	Lease receivable		173,052
12/31/2020	Interest receivable	55,276
	Interest revenue		55,276