9. Marcos, Inc. enters into a lease agreement as lessor on January 1, 2018, to l
ID: 2579232 • Letter: 9
Question
9. Marcos, Inc. enters into a lease agreement as lessor on January 1, 2018, to lease an airplane to Oriental 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 a. Oriental Airlines has the option to purchase the airplane for $16,000,000 when the lease expires at which time the fair value is expected to be $27,000,000. b. The airplane has a cost of $68,000,000 to Marcos, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence) Oriental Airlines will pay all executory costs related to the leased airplane. on its investment uncertainties surrounding the costs yet to be incurred by Lucas. c. d. Annual beginning of year lease payments of $9,563,671 allow Marcos to earn an 8% return e. Collectibility of the payments is reasonably predictable, and there are no importantExplanation / Answer
1. The type of lease is direct finance lease in lessor's (Marcos,inc) point of view because of the followng reasons
a) the lessee (Oriental Airlines) has an option to purchase the leased asset for $16,000,000 while the expected fair value on the date of purhase is $27,000,000, so lessee is going to purchase the lease asset for much lower price than its fair value (it is one of the condiitons for finance lease)
b) Most of the asset useful life is under lease with the lessee i.e 8 years lease out of 14 years asset's life
c) All the risks are being born by the lessee
d) the predictability that the payments are collectible with certainity
2. Amortization schedule in the books of lessor
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Date Lease Payment Lease Receivable Recovery Closing Lease rereceivable
1-1-2018 -- -- -- $68,000,000
1-1-2018 $9,563,671 0 9,563,671 58,436,329
1-1-2019 9,563,671 4,674,906 4,888,765 53,547,564
Note: Lease receivable is the rate of return on investment ie 8% to be calculated on closing lease receivable
On 1- 1- 2018, lease receivable is zero as the payment is made in the beginning of the year, so no time period to calculate the return
On 1-1-2019, lease receivable is $ 4,674,906 (ie. 8% of 58,436,329)
Lease Recovery is the difference between Lease payment and Lease receivable
Closing lease receivable is the difference between previous year closing balance and lease recovery of current year
Lease payment = (Cost of the asset - Present value of purchase price of leased asset after 8 years)/PVAF8%, 8yers x (1+r)
= $68,000,000 - (16,000,000 x PVF8%, 8 years )/ 5.7466 x (1+0.08)
= $68,000,000 - (16,000,000 x 0.54027)/6.20637
= $68,000,000 - 8,644,320/6.2067
= 59,355,680/6.20637 = $9,563,671
3. Journal entries in the books of Lessor
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Date Description Debit ($) Credit ($)
1-1-2018 Dr Cash 9,563,671
Dr Lease Receivable 58,436,329
Cr Airplane 68,000,000
( For recording Lease agreement )
31-12-2018 Dr Inteest Receivable 4,674,906
Cr Interest Revenue 4,674,906
( For interest income )
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