Financial statement effects of operating and capital leases. Excerpts from the notes to the financial statements of American Airlines for a recent year reveal the following (amounts in millions):

a. Assume that American Airlines makes all lease payments at the end of each year. Prepare an analysis that explains how the liability for capital leases increased from \(\$ 2,233\) million on December 31, Year 10, to \(\$ 2,403\) million on December 31, Year 11 .

b. Prepare an analysis that explains how the leasehold asset increased from \(\$ 1,716\) million on December 31, Year 10, to \(\$ 1,878\) million on December 31, Year 11.

c. Give the journal entries to account for capital leases during Year 11.

d. Give the journal entries to account for operating leases during Year 11.

e. The present value at 10 percent of American's operating lease commitments is \(\$ 7,793\) million on December 31, Year 10, and \(\$ 8,164\) million on December 31, Year 11. The leases have an average remaining useful life of 22 years on each date. Prepare the journal entries to convert these operating leases into capital leases as of December 31, Year 10, and to account for the leases as capital leases during Year 11.

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December 31 Leased Asset (net of accumulated depreciation) Lease Liability Year 10 $1,716 $2,233 Year 11 $1,878 $2,403 Future minimum commitments under leases with lease periods extending beyond one year appear below. Capital Leases Operating Leases Year December 31, Year 10 December 31, Year 11 December 31, Year 10 December 31, Year 11 11 $ 268 - $ 946 - 12 281 $ 273 924 $ 982 13 268 300 920 967 14 250 280 931 939 15 245 276 912 954 16 240 270 915 961 Later Years 2,164 2,440 14,463 16,420 $3,716 $3,839 $20,011 $21,223 Interest Portion (8%). (1,483) (1,436) Capitalized Lease Obligation $2,233 $2,403