Washington Airlines leased an airplane from Boeing on January 1, 2015. The airpl
ID: 2554843 • Letter: W
Question
Washington Airlines leased an airplane from Boeing on January 1, 2015. The airplane has a fair value of $20,000,000. The airplane is expected to have a residual value equal to 20% of its original value at the conclusion of the lease. The lease is for 10 calendar years and calls for the semi-annual payments each June 30 and Dec. 31.
Other Information:
Washington’s cost of capital (Interest rate) used in its operations is 12%.
Boeing’s implicit of capital (interest rate) is 10%. Delta is aware of this rate.
Required: (Show all Calulations) :
Determine the amount of each of the semi-annual lease payment.
Prepare the journal entry for Washington Company at the inception of the lease.
Prepare the journal entry for the first lease payment on Washington’s book.
Prepare the journal entry for the second lease payment on Boeing’s books.
Suppose Boeing accounted for this lease as a sales-type lease. Prepare the journal entry to record the inception of the lease assuming Boeing manufactured the machine at the cost of $13 million.
Explanation / Answer
1) Amount of Lease Paymet (Semi Annually on 30th June & 31st Dec.)
= Cost of airplane / PVAF (5%, 20 Years)
= $20,000,000 / 12.4622
= $ 16,04,853.
2) Journal entry for Washington Company at the inception of the lease :
Leased Asset account Debit $20,000,000 -
To Lease liability to boeing account - $ 20,000,000
3) Journal entry for the first lease payment on Washington’s book :
Lease liability to boeing account debit $ 6,04,853 -
Interest expense on lease account debit $ 10,00,000 -
To Cash/Bank Account - $16,04,853
4) Journal entry for the second lease payment on Boeing’s books :
Cash/Bank account debit $ 16,04,853 -
To Lease receivable account - $ 6,35,095
To Interest income on lease - $ 9,69,758
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