Ritter, inc. enters into a lease agreement as lesser on January 1, 20X1, to leas

Question

Ritter, inc. enters into a lease agreement as lesser on January 1, 20X1, 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. National Airlines has the option to purchase the airplane for $7,000,000 when the lease expires. At that time the fair value is expected to be $12,000,000. The airplane has a cost of $30,00,000 to Ritter, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time due to technological obsolescence. National airlines will pay all executor costs related to the leased airplane. Annual year end lease payments of $4,562,337 allow Ritter to earn an 8% return on its investment. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Ritter. What type of lease is this to the lesser? Explain thoroughly the reason for your answer. Prepare a lease amortization schedule for the lesser for the first two years of the lease. Round all calculations to nearest dollar. Prepare the journal entries, in proper general journal form, on the books of the lesser that are required to account for this lease for the first two years of the lease. Be sure to indicated the date of the date of the entry and provide a brief explanation for your entry.

Explanation / Answer

1.This is a direct finance type lease as it meets all characteristics of direct finance lease

2.

38,888,346   [43010022-4121676]

*No interest in 1/1/15 as installment is paid at beginning.

***Interest in1/1/2016 = 43010022*.08 = 3440802

3) cash Debit    4562337

Lease receivable credit 4562337

[being first lease payment recorded]

Accrued interest revenue debit $34,40,802

Interest revenue credit $ 3,440,802

Date Annual lease payment Interest on lease receivable Lease receivable recovery Lease receivable 1/1/2015 0 0 0 30,000,000 1/1/2015 4,562,337 0** 4,562,337 43,010,022 1/1/2016 4,562,337 364986.96 4,121,676    [7992578-3870902]

38,888,346   [43010022-4121676]

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