Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, Hayes Corp.

Question

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, 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.      Equal annual payments that are due on January 1 each year provide Hayes Corp. with an 8% 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 $50,000. The cost of each trailer to Hayes Corp. is $45,000. Each trailer has an expected useful life of nine 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? Discuss.

(b)    Calculate the annual lease payment. (Round to nearest dollar.)

(c)    Prepare a lease amortization schedule for Hayes Corp. for the first three years.

(d)    Prepare the journal entries for the lessor for 2014 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).

Explanation / Answer

Answer:(a) It is a sales-type lease to the lessor, Hayes Corp. Hayes's (the manufacturer) profit upon sale is $50,000, which is recognized in the year of sale (2014). It is not an operating lease because title to the assets passes to the lessee, and the present value ($500,000) of the minimum lease payments equals or exceeds 90% ($450,000) of the fair value of the leased trailers. The remaining accounting treatment is similar to that accorded a direct-financing lease.

Answer:(b) ($50,000 × 10) ÷ 4.99271 = $100,146

Answer:(c)

Answer:(d) Lease Receivable. ........................................................................ 500,000

               Cost of Goods Sold. ..................................................................... 450,000

                        To Sales Revenue. ................................................................ 500,000

                          To Inventory. ..........................................................................    450,000

Lease Amortization Schedule (Lessor) Date Annual Lease Rental Interest on Lease Receivable Lease Receivable Recovery Lease receivable 1/1/2014 500000 12/31/2014 100146 40000 60146 439854 12/31/2015 100146 35188.32 64957.68 374896.32 12/31/2016 100146 29991.7056 70154.2944 304742.0256

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