On January 1, 2020, Hawkeye Air leased a new airplane for 5 years. The expected life of the airplane is 20 years. The lease stipulates that Hawkeye Air makes annual payments of $1,085,923 payable at the beginning of each year. Hawkeye Air has an incremental borrowing rate of 4.3%. Hawkeye Air has an option to renew the lease with a 2% increase in the lease payment. 1) How will the lease be classified and how do you know? 1b) Calculate the present value of the lease payments. 2) What is the balance sheet impact of the lease at the beginning of the lease (1/1/2020)? 2a) What is the income statement impact of the lease for 2020? 2b) Identify any effects the lease arrangement and the associated reporting would have on the statement of cash flows for 2020.
On January 1, 2020, Hawkeye Air leased a new airplane for 5 years. The expected life of the airplane is 20 years. The lease stipulates that Hawkeye Air makes annual payments of $1,085,923 payable at the beginning of each year. Hawkeye Air has an incremental borrowing rate of 4.3%. Hawkeye Air has an option to renew the lease with a 2% increase in the lease payment. 1) How will the lease be classified and how do you know? 1b) Calculate the present value of the lease payments. 2) What is the balance sheet impact of the lease at the beginning of the lease (1/1/2020)? 2a) What is the income statement impact of the lease for 2020? 2b) Identify any effects the lease arrangement and the associated reporting would have on the statement of cash flows for 2020.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On January 1, 2020, Hawkeye Air leased a new airplane for 5 years. The expected life of the airplane is 20 years. The lease
stipulates that Hawkeye Air makes annual payments of $1,085,923 payable at the beginning of each year. Hawkeye Air has
an incremental borrowing rate of 4.3%. Hawkeye Air has an option to renew the lease with a 2% increase in the lease
payment.
1) How will the lease be classified and how do you know?
1b) Calculate the present value of the lease payments.
2) What is the balance sheet impact of the lease at the beginning of the lease (1/1/2020)?
2a) What is the income statement impact of the lease for 2020?
2b) Identify any effects the lease arrangement and the associated reporting would have on the statement of cash flows
for 2020.
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