Question
Hayes Corp. is a manufacturer of semi-truck trailers. On January 1, 2017, Hayes Corp. leases one trailer to Fort Valley Trucking Company under a six-year
Hayes Corp. is a manufacturer of semi-truck trailers. On January 1, 2017, Hayes Corp. leases one trailer to Fort Valley Trucking Company under a six-year noncancelable lease agreement. The following information is provided regarding the lease and the trailer:
The implicit rate of return inherent in this lease is 8%. Fort Valley is aware of that 8% rate of return.
The lease requires Fort Valley (the lessee) to make equal annual payments of $12,018 on January 1 of each year, starting January 1, 2017 (the day the lease is signed). The present value of those payments is $60,000.
Title to the trailer passes to Fort Valley at the end of the lease.
The fair value of the trailer is $60,000. The cost of the trailer to Hayes Corp. was $54,000.
The trailer has an expected useful life of nine years.
Hayes considers the collectability of the lease payments to be probable.
Hayes (the lessor) properly classifies this lease as a sales-type lease and Fort Valley (the lessee) properly classifies it as a finance lease. Fort Valley depreciates similar assets using the straight-line method assuming zero salvage value.
Required
a) Prepare all of the required the journal entries for Fort Valley (the lessee) for the year ending December 31, 2017.
b) Prepare all of the required the journal entries for Hayes (the lessor) for the year ending December 31, 2017.
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