In order for a lessor to classify a lease as a direct

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Solution 21-113 In order for a lessor to classify a lease as a direct-financing or a sales-type lease, the lease at the date of inception must satisfy one or more of the following Group I criteria (a, b, c, and d) and both of the following Group II criteria (a and b): Group I (a) The lease transfers ownership of the property to the lessee. (b) The lease contains a bargain purchase option. 21 - 32
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Accounting for Leases Solution 21-113 (cont.) (c) The lease term is equal to 75% or more of the estimated economic life of the leased property. (d) The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property. Group II (a) Collectibility of the payments required from the lessee is reasonably predictable. (b) No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. Ex. 21-114 —Direct-financing lease (essay). Explain the procedures used to account for a direct-financing lease. Solution 21-114 The lessor records the present value of the minimum lease payments (excluding executory costs) plus the present value of the unguaranteed residual value (a guaranteed residual value is included in the minimum lease payments) as Lease Receivable and removes the asset from the books. The lessor records payments received as a reduction in Lease Receivable and Interest Revenue. Interest revenue is recognized by using the effective-interest method. The implicit interest rate is applied to the declining balance of the Lease Receivable balance. The implicit rate is the rate of interest that will discount the minimum lease payments (excluding executory costs) and the unguaranteed residual value to the fair value of the asset at the inception of the lease. Ex. 21-115 —Lessor accounting—sales-type lease. Hayes Corp. is a manufacturer of truck trailers. On January 1, 2011, 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 that are due on December 31 each year provide Hayes 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 Hayes 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 Hayes 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 Hayes Corp. for the first three years.
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