Johnson Co enters into a lease agreement as a lessor on January 1, 2014, to leas
ID: 2462852 • Letter: J
Question
Johnson Co enters into a lease agreement as a lessor on January 1, 2014, to lease an airplane to ABC Airlines. The term of the non-cancelable lease is eight years and payments are required to be at the end of each year. The following information relates to this agreement:
1. ABC Airlines has the option to purchase an airplane for 12,000,000 when the lease expires at which time the fair value is expected to be $20,000,000. It is agreed by both parties that the terms reflecy a bargain purchase agreement.
2. The airplane has a cost of $51,000,000 to Johnson, an estimated useful life of fourteen years, and a salvage value of 0 at the end of that time (due to technological obsolescense)
3. National airlines will pay all executory costs related to the leased airplane
4. Annual beginning of year lease payments of 7,172,753 are computed to enable Johnson to earn an 8% return on its investment
5. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.
a. What type of lease is this? Discuss.
b. Verify the computation of the annual lease payments
c. Prepare a lease amortization schedule for the lessor for the first two years (2014-2015) (Round to nearest dollar.)
d. Prepare journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize revenue, for 2014.
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Explanation / Answer
A) This type of lease is capital lease Under a capital lease, the lessee is essentially buying the asset from the lessor, with the lease payments functioning as a financing arrangement. If the lease meets one of these four criteria, it must be accounted for as a capital lease:
B) Anual lease payment is 7172753
So present value of lease payment is 7172753 * Annuity factor @ 8 % i.e 5.75
Present value of bargain price @ 8 % PV factor = 12000000*0.54
Minimum lease payment is 6483226.61= 47726556.36 is greator than 90 % of 51000000
C
C ) jounral entry
1) Lease receivable Dr - 51000000
To Airplane asset - 51000000
2) Cash A/c - 7172753
To Lease receivable A/c - 7172753
3 ) Interest receivable A/c Dr- 3506180
Interest income A/c - 3506180
Year Lease payment Int income @ 8 % Closing balance 51000000 2014 7172753 3506180 47333426.76 2015 7172753 3212854 43373527.66Related Questions
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