Question - Rodeo Corporation is a manufacturer of truck trailers. On January 1, 2010 Rodeo Corporation leases a trailer to Roadway Express Company under a 6 year noncancellable agreement. The following information about the lease and the trailer is provided:
1. The first of 6 equal payments of $8,266 was received on January 1, 2010. All future payments are to be received on January 1 each year. Rodeo Corporation expects a 10% return on net investment.
2. Title to the trailer passes to Roadway Express at the end of the lease.
3. The fair value of the trailer is $39,600. The cost of the trailer to Rodeo Corporation is $32,400. The trailer has an expected useful life of 9 years and an expected salvage value at that time of $1,000.
4. Collectability of lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Rodeo Corporation.
Required:
1. What type of lease is this to Rodeo Corporation? Use criteria to justify your answer.
2. Prepare the journal entries from January 1, 2010 to December 31, 2010 to record the lease agreement. Rodeo Corporation has a December 31 year end and uses a perpetual inventory method.