On January 1, 2020, Sahali Air Inc. enters into an 8-year lease agreement to lease an airplane to Duoprop Airlines, with payments required at the end of each year. Sahali follows IFRS. The following information relates to this agreement: Duoprop Airlines has the option to purchase the airplane for $7,000,000 at the end of the lease, at which time the airplane’s fair value is expected to be $12,000,000. The airplane cost Sahali Air $30,000,000. It has an estimated useful life of 15 years, and a residual value of zero at the end of that time (due to technological obsolescence). Duoprop will pay all executory costs related to the leased airplane. Annual year-end lease payments of $4,562,339.49 will allow Sahali Air to earn an 8% return on its investment. Instructions What type of lease is this for the lessor? Justify your answer. Prepare a lease amortization schedule for the lessor, Sahali Air, for the first two years (2020 and 2021). Round all amounts to the nearest dollar. Prepare the journal entries on Sahali Air’s books to record the lease agreement, to reflect payments received under the lease, and to recognize income for the years 2020 and 2021.
On January 1, 2020, Sahali Air Inc. enters into an 8-year lease agreement to lease an airplane to Duoprop Airlines, with payments required at the end of each year. Sahali follows IFRS. The following information relates to this agreement:
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Duoprop Airlines has the option to purchase the airplane for $7,000,000 at the end of the lease, at which time the airplane’s fair value is expected to be $12,000,000.
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The airplane cost Sahali Air $30,000,000. It has an estimated useful life of 15 years, and a residual value of zero at the end of that time (due to technological obsolescence).
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Duoprop will pay all executory costs related to the leased airplane.
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Annual year-end lease payments of $4,562,339.49 will allow Sahali Air to earn an 8%
return on its investment.
Instructions
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What type of lease is this for the lessor? Justify your answer.
-
Prepare a lease amortization schedule for the lessor, Sahali Air, for the first two years (2020 and 2021). Round all amounts to the nearest dollar.
-
Prepare the
journal entries on Sahali Air’s books to record the lease agreement, to reflect payments received under the lease, and to recognize income for the years 2020 and 2021.
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