Problem - Silas Corp. is a manufacturer of truck trailers. On January 1, 2016, Silas Corp. leases ten trailers to Polley Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided:
1. Equal annual payments that are due on December 31 each year provide Silas Corp. with an 8% return on net investment.
2. Titles to the trailers pass to Polley at the end of the lease.
3. The fair value of each trailer is $60,000. The cost of each trailer to Silas Corp. is $54,000. Each trailer has an expected useful life of nine years.
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 Silas Corp.
Instructions
(a) What type of lease is this for the lessor? Discuss why it is this type of lease.
(b) Calculate the annual lease payment. (Round to nearest dollar.)
(c) Prepare a lease amortization schedule for Silas Corp. for the first two years.
(d) Prepare the journal entries for the lessor for 2016 and 2017 to record the lease agreement, and the receipt of cash for the lease rentals (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).