Question

Lucas, Inc. enters into a lease agreement as lessor on January 1, 2018, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the beginning of each year. The following information relates to this agreement: 1. National 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. 2. The airplane has a cost of $68,000,000 to Lucas, a fair value of $68,000,000, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence). 3. National Airlines will pay all executory costs related to the leased airplane. 4. Annual beginning of year lease payments of $9,563,671 allow Lucas to earn an 8% return on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas. Instructions

(a) What type of lease is this?

(b) Prepare the 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 2018

Answer 1

A) the lease is a direct-financing type lease from the lessor's point of view or a capital lease from the lessee's point of view. The lease contains a bargain purchase option which satisfies one of the criteria for classification as a direct-financing lease. The option to buy for $16000,000 at the termination of the lease when the asset is expected to have a fair value of $27000,000 constitutes a bargain purchase option. Additionally, the payments are collectible, and there are no uncertanities as to future lessors cost

B)

Date	journal	debit	credit
Jan 1	lease receivable	68000000
	To airplane		68000000
Jan 1	cash	9563671
	To lease receivable		9563671
Dec 31	interest receivable	4674906
	To interest revenue		4674906
	( 68000000 - 9563671) × 8%

For nay query please comment and DO GIVE POSITIVE RATING