Question

Below are three lease transactions for VNN Airways in 20XX as the Lessee. All leases start on 1/1/XX.

	Lessors
	BJN Leasing	CMN Leasing	BVC Leasing
Type of property	787 Aircraft	727 Aircraft	L-1011 Aircraft
Yearly rental	$7,445,064	$5,449,423	$2,851,861
Lease term	15 years	15 years	20 years
Estimated economic life	25 years	25 years	25 years
Fair market value of leased asset	$69,300,000	$54,000,000	$32,000,000
Present value of the rental payments	$63,000,000	$46,000,000	$28,000,000
Purchase price at end of lease	$15,000,000	$9,000,000	$7,000,000

Instructions (and a hint: remember the four criteria for a capital lease? Only one needs to be met)

1. Identify the three above leases as either operating or capital leases, and explain your answer.
2. Record the initial journal entry for any of the above that are capital leases.
3. Record the journal entry for any of the above that are operating leases.

Answer 1

BJN Leasing	CMN Leasing	BVC Leasing
Capital Lease	Operating lease	Capital Lease
( The present value of the lease rental of such a lease is greater than 90% of the fair value of the asset leased at the time of lease		(The lease term is greater than or equal to 75% of the asset’s useful economic life)
=63000000/69300000		=20/25
=90.9%		=80%
Journal Entry for BJN Leasing
	Debit	Credit
Gross Asset	63000000
Lease Liability		63000000
( Being capital lease liability recognised)
Journal Entry for CMN Leasing
Annual Lease rental expense	5449423
Bank		5449423
( Being lease rent recognised)