PR 7 Lessor accountingsales-type lease.

Premier Corp. is a manufacturer of truck trailers. On January 1, 2008, Premier Corp. leases ten trailers to Runaway 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 Premier Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288).

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

3. The fair value of each trailer is $50,000. The cost of each trailer to Premier Corp. is $45,000. 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 Premier 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 Premier Corp. for the first three years.

(d) Prepare the journal entries for the lessor for 2008 and 2009 to record the lease agreement, the receipt of the lease rentals, and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).