Smith Corp. is a manufacturer of truck trailers. On January 1, 2015, Smith Corp.

Question

Smith Corp. is a manufacturer of truck trailers. On January 1, 2015, Smith Corp. leases ten trailers to Lester Company under a six-year noncanceble lease agreement. The following information about the lease and the trailers is provided: Equal annual payments that are due on January 1 each year provide Smith Corp. with an 8% return on net investment. Titles to the trailers pass to Lester at the end of the lease. The fair value of each trailer is 550,000. The cost of each trailer to Smith Corp. is $45,000. Each trailer has an expected useful life of nine years. Collectability of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Smith Corp. Instructions What type of lease is this for the lessor? Discuss. Calculate the annual lease payment. (Round to nearest dollar.) Prepare a lease amortization schedule for Smith Corp. for the first three years. Prepare the journal entries for the lessor for 2015 and 2016 to record the lease agreement, the receipt of the lease rentals, and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).

Explanation / Answer

(a) Sales type

(b) Annual lease payment

= $(50,000*10)/ 4.62288 = $108,158

( PV of annuity t= 6 ; i = 8%)

(c) Lease Amortisation Schedule

(d) Journal entries

                                    Interest revenue                                                   $40,000

Dec 31,2016                   Cash                                     $108,158

                                   lease recievable                                                     $73,160

                                    Interest revenue                                                    $34,548

Date Annual lease rental Interst on loan recievable Recievable recovery lease recievable 1/1/15 108,158 $500,000 12/31/15 108,158 $40,000 $68,158 $431,842 12/31/16 108,158 $34,548 $73,610 $358,232 12/31/17 108,158 $28,659 $79,499 $278,733 12/31/18 108,158 $22,299 $85,859 $192,874 12/31/19 108,158 $15,430 $92,728 $100,146 12/31/20 108,158 $8,012 $100,146 -

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