Hayes Corp. is a manufacturer of truck trailers. On January 1, 2021, 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. Equal annual payments of $120,175 that are due on January 1 each year provide Hayes Corp. with an 8% return on net investment.

2. Titles to the trailers pass to Lester at the end of the lease.

3. The fair value of each trailer is $60,000. The cost of each trailer to Hayes Corp. is $54,000. Each trailer has an expected useful life of nine years.

4. Collectibility of the lease payments is probable.

Instructions

(a) What type of lease is this for the lessor? Discuss.

(b) Prepare the journal entries for the lessor for 2021 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).