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Hayes Company signs a five-year non-cancelable lease with Lester Company on January 1, 2008, when the lease begins. The lease calls for five payments of $79,139 to be made at the beginning of each year. The leased asset has a fair value of $350,000 on January 1, 2008. The lease has no renewal option, and possession of the asset reverts to the lessor on January 1, 2013. Hayes Company regularly uses the straight-line method to depreciate assets of this type that it owns. Lester also uses the straight-line method for depreciation purposes. The leased asset has an expected economic life of six years. The lease required Lester Company to guarantee that the asset's residual fair value on that date would be no lower than $20,000 when it returns to lease on January 1, 2013. Executory costs paid to the lessor by are $2,000 per year and are not included in the minimum lease payments. Lessor's implicit interest rate is 11% and lessee borrowing rate is 10%. The lessee is not aware of the lessor's implicit rate.

Required:

a. Give the appropriate journal entries for Lester Company through December 31, 2009.

b. Based on the above lease contract, answer the following:

-Item(s) and related amount(s) in years 2008 and 2009 reported on:

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows

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  • Category:- Accounting Basics
  • Reference No.:- M944466

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