Lucas, Inc

question 109

Essay

Lucas, Inc. enters into a lease agreement as lessor on January 1, 2015, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the end of each year. The following information relates to this agreement:1. National Airlines has the option to purchase the airplane for $12,000,000 when the lease expires at which time the fair value is expected to be $20,000,000.2. The airplane has a cost of $51,000,000 to Lucas, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence).3. National Airlines will pay all executory costs related to the leased airplane.4. Annual beginning of year lease payments of $1,172,753 allow Lucas to earn an 8% return on its investment."5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.
Instructions
(a) What type of lease is this? Discuss.
(b) Prepare a lease amortization schedule for the lessor for the first two years (2015-2016). (Round all amounts to nearest dollar.)(c) Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize revenue, for 2015."

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Definitions:

Binding Contract

An agreement between parties that is legally enforceable and has all the essential elements of a contract.

Offeror

The party in a contract proposition who makes the offer to enter into an agreement, proposing terms to another party, the offeree.

Offeree

The party to whom an offer is made in a transaction or agreement.

Offeror

The party in a contract negotiation who makes a proposal or offer to another party for entering into an agreement.