Question
1. On January 1, 2020, Hawkeye Air leased a new airplane for a term of 8 years. The expected life of the airplane is 20
1. On January 1, 2020, Hawkeye Air leased a new airplane for a term of 8 years. The expected life of the airplane is 20 years. There are no rights to purchase the asset at the end of the term, no bargain purchase option, and no residual value guarantee. The lease stipulates that Hawkeye Air makes annual payments of $550,000 beginning at the end of the first year (December 31, 2020). Hawkeye Air has an incremental borrowing rate of 6% and the fair market value of the airplane on January 1, 2020 is $6,250,000 (for simplicity, assume the lessors implicit rate is greater than 6%).
a. What journal entries related to the lease arrangement should be recorded during 2020 (assume Hawkeye Airs fiscal year-end is December 31).
b. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.
c. What is the annual lease payment that results in a present value of minimum lease payments equal to 90% of the fair market value of the airplane ($6,250,000)?
Now assume that the lessor decided to require the lease payments at the beginning of the year as opposed to the end of the year. Also, assume that the lease arrangement had a bargain purchase option under which the lessee could purchase the airplane at the end of the contract for $500,000.
d. What journal entries related to the lease arrangement should be recorded during 2020.
e. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started