Question:

Fahad Corp. is a manufacturer of truck trailers. On January 1, 2015, Fahad 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 that are due on December 31 each year provide Fahad 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 Lester at the end of the lease.

3. The fair value of each trailer is $50,000. The cost of each trailer to Fahad Corp. is $45,000. Each trailer has an expected useful life of nine years.

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 Fahad Corp. for the first three years.

(d) Prepare the journal entries for the lessor for 2015 and 2016 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).

(e) Explain the distinction between a direct- financing lease and a sales-type lease for lessor.