Q4: Lucas, Inc. enters into a lease agreement as lessor on January 1, 2011, to l
ID: 2596575 • Letter: Q
Question
Q4: Lucas, Inc. enters into a lease agreement as lessor on January 1, 2011, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the end of each year. The following information relates to this agreement:
1. National Airlines has the option to purchase the airplane for $9,000,000 when the lease expires at which time the fair value is expected to be $15,000,000.
2. The airplane has a cost of $38,000,000 to Lucas, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence).
3. National Airlines will pay all executory costs related to the leased airplane.
4. Annual year-end lease payments of $5,766,425 allow Lucas to earn an 8% return on its investment.
5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.
Instructions
(a) What type of lease is this? Discuss.
(b) Prepare a lease amortization schedule for the lessor for the first two years (2011-2012). (Round all amounts to nearest dollar.)
(c) Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2011 and 2012 (check: interest revenue for year 2012 is $2,821,886).
Explanation / Answer
a. This is classified as capital lease. The reason being that the airplane will be valueless due to technological obsolescence at the end of the lease term.
b. Lease amortization schedule
c. Journal
Date Instalment Interest expense Pincipal payment Outstanding Jan 1, 2011 $38000000 Dec 31, 2011 5766425 3040000 2726425 35273575 Dec 31, 2012 5766425 2821886 2944539 32329036Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.