Chapter 18, Problem 18.11E

Classification as Finance or Operating Lease, Lessee, Journal Entries. On January 1, 2018, Lima Leasing Company (LLC) acquired an airplane to be leased to LA Sky Company. LLC paid $950,000 to acquire the plane, which is also its fair value. The lease terms follow:

• Annual rental payments of $190,000 are due January 1 of each year, beginning on January 1, 2018. There are no nonlease payments.
• The lease term is 6 years.
• There is neither a residual value or a purchase option.
• The economic life of the asset is 8 years, and the airplane is not specialized in nature.
• The lessee's incremental borrowing rate is 8%, and the lessee does not know the lessor's implicit rate.

LLC indicates that collectability of lease payments is reasonably assured. LA Sky depreciates similar vehicles it owns using the straight-line method.

Required

1. a. Classify the lease as either a finance lease or an operating lease for LA Sky Company, the lessee.
2. b. Prepare the journal entries at lease commencement and the first lease payment for the lessee.
3. c. Prepare an amortization table for the lease.
4. d. Prepare the journal entries at the end of the first year and for the second lease payment for LA Sky Company, the lessee.