Myakka Company is a manufacturer of truck trailers. On January 1, 20X8, Myakka C

Question

Myakka Company is a manufacturer of truck trailers. On January 1, 20X8, Myakka Company leases ten trailers to River 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 Myakka Company with an 8% return on net investment. (2)Titles to the trailers pass to River at the end of the lease. (3) The fair value of each trailer is $50,000. The cost of each trailer to Myakka Company is S45,000. 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 Myakka Company. REQUIRED: (1) (2) (3) (4) What type of lease arrangement is this for Myakka Company? Be specific and explain the reason for your answer. Calculate the amount of the annual lease payment for Myakka. Round your answer to the nearest whole dollar Prepare a lease amortization schedule for Myakka Company for the first three years of the lease. Prepare the required general journal entries, in proper form, for Myakka for the year ending December 31, 20X8 and 20X9. Provide an explanation for each entry made. Round all calculations to the nearest whole dollar.

Explanation / Answer

1 It is a sales-type lease to the lessor, myakka Corp. myakka (the manufacturer) profit upon sale is $50,000, which is recognized in the year of sale . 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. 2 ($50,000 × 10) ÷ 4.62288 = $108,158 present value factor for 6 periods at 8% is 4.62288 3 Lease Amortization Schedule Date Annual Lease Rental Interest on Lease Receivable Lease Receivable Recovery Lease Receivable 01/01/20X8 500000 12/31/20X8 108158 40000 68158 431842 12/31/20X9 108158 34547 73611 358231 12/31/20X0 108158 28659 79499 278732 4 Date General Journal Debit Credit 01/01/20X8 Lease Receivable 500000 Cost of goods sold 450000 Sales Revenue 500000 Inventory 450000 12/31/20X8 Cash 108158 Lease Receivable 68158 Interest Revenue 40000 12/31/20X9 Cash 108158 Lease Receivable 73611 Interest Revenue 34547

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