Atchafalaya Corp. is a manufacturer of truck trailers. On January 1,20X1, Atchaf

Question

Atchafalaya Corp. is a manufacturer of truck trailers. On January 1,20X1, Atchafalaya Corp. leases ten trailers to a company under a six year noncancellable lease agreement. The following information about the lease and the trailers is provided below. ATCHAFALAYA CORP. LEASE INFORMATION FOR LEASING TRAILERS (a) Equal annual payments that are due on December 31 each year provide Atchafalaya Corp with an 8% return on net investment. (b) |Titles to the trailers pass to the lessee at the end of the lease. (c) |The fair value of each trailer is S50,000. The cost of each trailer to Atchafalaya Corp. is S45,000. Each trailer has an expected useful life of nine years. (d) Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Atchafalaya Corp.

Explanation / Answer

1 It is a sales-type lease to the lessor, Atchafalaya Corp. Atchafalaya (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 theminimum 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 01/01/20X1 500000 12/31/20X1 108158 40000 68158 431842 12/31/20X2 108158 34547 73611 358231 12/31/20X3 108158 28659 79499 278732 4 Date General Journal Debit Credit 01/01/20X1 Lease Receivable 500000 Cost of goods sold 450000 Sales Revenue 500000 Inventory 450000 12/31/20X1 Cash 108158 Lease Receivable 68158 Interest Revenue 40000 12/31/20X2 Cash 108158 Lease Receivable 73611 Interest Revenue 34547

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