TEST #3 PROBLEM 2 Points) Lucas, Inc. to National Airlines eight years and payme
ID: 2597051 • Letter: T
Question
TEST #3 PROBLEM 2 Points) Lucas, Inc. to National Airlines eight years and paymen enters into a capital lease agreement as lessor on July 1, 2012, to lease an airplane . Lucas' year end is Decmber 31. The term of the noncancelable lease is sents are required at on June 30 or each year. The following information relates to this agreement: 1. N ational Airlines has the option to purchase the airplane for $1,000,000 when the lease expires at which time the fair value is expected to be $20,000,000. 2. The airplane has a cost of $51,000,000 to Lucas, an estimated useful life of fourteen years, nd a salvage value of zero at the end of that time (due to technological obsolescence) Straight line depreciation can be assumed. 3, Annual year-end lease payments of $8,780,736 allow Lucas to earn an 8% return on its investment, even though National does not know this and could borrow at a rate of 9% to buy this airplane outright. 5. Col lectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas. The present value factor of an ordinary annuity for 8 years at 8% is 5.74664; the present value factor ofan annuity due for 8 years at 8% is 6.20637; the present value factor for a single sum for 8 years at 8% is .5402. value 7. The present value factor of an ordinary annuity for 8 years a 9% is 5.53482, the present factor of an annuity due for 8 years at 9% is 6.03295, the present value factor for a single sum for 8 years at 9% is .50187 Instructions (c) Indicate why this is a capital lease. Which test is being met and show me the amounts if applicable (d) Prepare the lease amortization schedule up to 6/30/14. Luca s (c) Prepare the journal entries on Lucas's books that relate to the lease agreement for th following dates: 1. July 1, 2012 2. December 31, 2012. 3. June 30, 2013 4. December 31, 2013. (d) EXPLAIN the entries that the lessee would make on July 1, 2012 and December 31 2012, letting me know the amounts that go into these entries and EXPLAIN why these amounts are different from the lessor's amounts IF that is the case USE NEXT PAGE FOR ANSWERSExplanation / Answer
1. This lease is a capital lease due to the following reason:
2. Lease amortization schedule
c. Journal
d. The entry made on July 1, 2012 reflects the amount that will be received from the lessee over the lease period. This is equal to the sum of "present value of minimum lease payments and present value of bargain purchase option". The amount is equal to the cost of lease of $51,000,000
The entry made on Dec 31, 2012 reflects the interest accrued under the lease during the period. This entry reflects the six-month interest accrued. It is calculated as = $51,000,000 x 8% x 6/12 = $2,040,000
Lease payment date Instalment Interest revenue Principal Amount outstanding July 1, 2012 $51,000,000 June 30, 2013 8,780,736 4,080,000 4,700,736 46,299,264 June 30, 2014 8,780,736 3,703,941 5,076,795 41,222,469Related Questions
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