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1. On January 1, 2020, Hawkeye Air leased a new airplane for a term of 8...

1. On January 1, 2020, Hawkeye Air leased a new airplane for a term of 8 years. The expected life of the airplane is 20 years. There are no rights to purchase the asset at the end of the term, no bargain purchase option, and no residual value guarantee. The lease stipulates that Hawkeye Air makes annual payments of $550,000 beginning at the end of the first year (December 31, 2020). Hawkeye Air has an incremental borrowing rate of 6% and the fair market value of the airplane on January 1, 2020 is $6,250,000 (for simplicity, assume the lessor’s implicit rate is greater than 6%).

a. What journal entries related to the lease arrangement should be recorded during 2020 (assume Hawkeye Air’s fiscal year-end is December 31).

b. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.

c. What is the annual lease payment that results in a present value of minimum lease payments equal to 90% of the fair market value of the airplane ($6,250,000)?

Now assume that the lessor decided to require the lease payments at the beginning of the year as opposed to the end of the year. Also, assume that the lease arrangement had a bargain purchase option under which the lessee could purchase the airplane at the end of the contract for $500,000.

d. What journal entries related to the lease arrangement should be recorded during 2020.

e. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.

Business   Accounting   
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Answer #1

The journal entry related to the lease arrangement should be recorded during 2020

a) Dec.31,2020 Dr: Rent expense ......................$550,000

Cr: Cash.........................................$ 550,000

The effects of the lease arrangement and the associated reporting would have on the balance sheet ,income statement and statement of cash flows

b) Balance Sheet - cash asset decrease from payments

Income Statement - increase in operating expenses resulting in a decrease in Net Income

Statement of Cash Flows -cash paid for Lease Payment in operating section

c) 5,625,000 = PMT*[1-(1.06^-8)]/.06

PMT=$ 9,05,827.25

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