Question 5 Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014,

Question

Question 5

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2014, Hayes Corp. leases 9 trailers to Lester Company under a 5-year noncancelable 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 Hayes Corp. with an 12% return on net investment (present value factor for 5 periods at 12% is 4.03735). Titles to the trailers pass to Lester at the end of the lease. The fair value of each trailer is $50,600. The cost of each trailer to Hayes Corp. is $45,800. Each trailer has an expected useful life of nine years. 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.

Explanation / Answer

It is a Financial lease.

Annual Lease payments=> (50600 *9) / 4.03735 => $ 112797

JOURNAL ENTRIES

1.Lease Receivable A/cDr. 455400

Cost of truck A/c dr. 412200

To sales A/c Cr. 455400

To Inventory A/c Cr. 412200

Jan 1, 2014

Cash A/c dr. 58149

To Lease Receiavble A/c cr. 58149

Dec 31 , 2014

Cash A/c Dr. 54648

To Interest A/c Cr. 54648

DATE ANNUAL LEASE RENTAL INTEREST LEASE RECEIVBLE RECOVERY LEASE RECEIVABLE 01/04/2014 455400 01/04/2014 112797 54648 58149 397251 01/04/2015 112797 47670 65127 332124 01/04/2016 112797 39855 72942 259182

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