Question

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2018, Hayes Corp. leases tentrailers to Lester Company under a six-year noncancelable lease agreement. The followinginformation about the lease and the trailers is provided:

1.Equal annual payments that are due on January 1 each year provide Hayes Corp. with an8% return on net investment (present value factor for 6 periods at 8% is 4.99271).

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

3.The fair value of each trailer is $60,000. The cost of each trailer to Hayes Corp. is $54,000.Each trailer has an expected useful life of nine years

A) From the lessee viewpoint what type of lease is this?

B)From the Lessor viewpoint what type of lease is this?

C) Calculate annual lease payments

D)What is the Lessor journal entry?

E) What is the Lessee journal entry?

Answer 1

(a)It is a sales-type lease to the lessor, Hayes Corp. Hayes’s (the manufacturer) profit upon sale is $60,000, which is recognized in the year of sale (2018). It is not an operating lease because title to the assets passes to the lessee, and the present value ($600,000) of the lease payments equals or exceeds 90% ($540,000) of the fair value of the leased trailers.

(b) Since it fulfil finance lease criteria. Hence it will be finance lease from lessee prospective.

(c) ($60,000 × 10) / 4.99271 = $120,175.

(d)

(e)