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. The first payment of $100,146 is due on January 1, 2014, and each subsequent payment is made each year on December 31, starting December 31, 2014. The rate of return for Hayes is 8%. This is also the borrowing rate for Lester.
2. Titles to the trailers pass to Lester at the end of the lease.
3. The fair value of the trailers is $500,000. The cost of the trailers to Hayes Corp. is $450,000. The trailers have an expected useful life of nine years, with no salvage value.
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: 1. What specific type of lease is this for the lessor? For the lessee?
2. Calculate the Present Value of the Minimum Lease Payments. Show your work and assumptions (type of PV and factors used).
3. Prepare a lease amortization schedule for the lessor through 12/31/14.
4. 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.
5. Prepare the journal entries for the lessee for 2014 to record the lease agreement, the payment of the lease rentals, including interest expense where appropriate, and depreciation (if applicable).