Question

Leases (Lessee and Lessor) Hayes Corp. is a manufacturer of truck trailers. On January 1, 2018, Hayes Corp. leases ten trailers to Lester Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided:

1.      The first payment of $100,146 is due on January 1, 2018, and each subsequent payment is made each year on December 31, starting December 31, 2018. The rate of return for Hayes is 8%. This is also the borrowing rate for Lester.

2.      Titles to the trailers pass to Lester at the end of the lease.

3.      The fair value of the trailers is $500,000. The cost of the trailers to Hayes Corp. is $450,000. The trailers have an expected useful life of nine years, with no salvage value.

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

1.      What specific type of lease is this for the lessor? For the lessee?

2.      Calculate the Present Value of the Minimum Lease Payments. Show your work and assumptions (type of PV and factors used).

3.      Prepare a lease amortization schedule for the lessor through 12/31/18.

4.      Prepare the journal entries for the lessor for 2018 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue.

5.      Prepare the journal entries for the lessee for 2018 to record the lease agreement, the payment of the lease rentals, including interest expense where appropriate, and depreciation (if applicable).

Answer 1

A)	It is a sales type lease to laster company although it contains the profit of $ 1,00,876/-
B)
fare value	5,00,000/- $
cost	4,50,000/- $
sale value	6,00,876/- $	100146 * 6
PRESENT VALUE FACTOR ( Present Value of the Minimum Lease Payments for 6 years)
year	present value
1st year	1	because payment was made in the beginning of the year)
2nd year	0.925925926
3ed year	0.85733882
4th year	0.793839803
5th year	0.735077918
6th year	0.680596202
	4.99277867

C)	for lease amortization schedule
Date	annual lease aggrement	interest on lease	lease amount receivable	lease receivable
1/1/2018				500000
1/1/2018	100146	0	100146	399854
31/12/2018	100146	31988.32	68157.68	331696.32
d)	journal entry
1st jan 2018	lease receivable	500000
	cost of good sold	450000
	sales revenue		500000
	inventory		4500000
1st jan 2018	cash	100146
	lease receivable		100146
31st Dec 2018	cash	100146
	interest revenue		31988.32
	lease amount receivable		68157.68