On January 1, 2016, 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 are listed below:
• Annual rental payments of $ 190,000 are due at the beginning of each year. These are the minimum (“pure”) rental payments and do not include any executor costs.
• Lease term is six years.
• There is no residual value and no bargain purchase option.
• The economic life of the asset is eight years.
• The lessee’s incremental borrowing rate and the lessor’s implicit rate are both 8%. LLC has no material uncertainties regarding future costs to be incurred under the lease and collectability is reasonably assured. LA Sky depreciates similar vehicles owned using the straight-line method.
Required
a. Classify the lease as either a capital lease or an operating lease for LA Sky Company, the lessee.
b. Prepare the journal entries at lease inception and the first lease payment for the lessee.
c. Prepare an amortization table for the lease. d. Prepare the journal entries at the end of the first year and for the second lease payment for LA Sky Com-pany, the lessee.