WoodyHayes Corp. is a manufacturer of truck trailers. On January 1, 2013, WoodyHayes Corp. leases a trailer to Lester Company under a six-year non-cancelable lease agreement. The following information about the lease and the trailers is provided:
1. Equal annual payments that are due on January 1 each year provide WoodyHayes Corp. with an 10% return on net investment. The first payment is due at inception of the lease.
2. The estimated useful life is 7 years with an estimated salvage/residual value of $10,000. The residual value is unguaranteed.
3. The fair value of the trailer is $150,000. The cost of the trailer to WoodyHayes Corp. is $125,000.
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 WoodyHayes Corp.
Instructions:
(a) What type of lease is this for the lessor? Discuss.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Hayes Corp. for the life of the lease.
(d) Prepare the journal entries for the lessor for 2013 to record the lease agreement, the receipt of the lease rentals, and the recognition of income.