Reference no: EM13524806

Baylor's Trailers Inc. is a manufacturer of truck trailers. On January 1, 2014 Baylor leases ten (10) trailers to Jasper Trucking Corporation under a six (6) year non-cancelable lease agreement. Additional information about the lease includes the following;
1. Equal payments are due on January 1 each year which provides Baylor with an 8% return on its net investment. (The present value factor for 6 periods at 8% is 4.99271)
2. Ownership of the trailers transfers to Jasper at the end of the lease.
3. The fair value of each trailer is $50,000. The cost of manufacturing each trailer to Baylor is $45,000. The trailers have an expected useful economic life of eight (8) years.
4. The collectability of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Baylor.
REQUIREMENTS:
a. Identify what type of lease this is and explain why.
b. Calculate the annual lease payment (round to nearest whole dollar).(Hint divide the gross amount of the lease payments by the present value factor)
c. Prepare a lease amortization schedule for the first three years of the lease in the format provide below.
d. Prepare the journal entries for the lessor (Baylor) for 2014 to record the lease agreement, the
e. Receipt of the first payment, and the recognition of revenue (assume Baylor uses the perpetual inventory method).

DATE Annual Lease Pymt Interest on Lease Rec'ble Lease Rec'ble Recovery Lease Rec'ble
1/1/14 ---- ------- -------

1/1/14 $-0-

1/1/15

1/1/16