C10-45. Interpreting Capital and Operating Leases JetBlue Airways Corporation reports the following leasing information in its 2014 10-K. Excerpt from Note 2-Long-term Debt, Short-term Borrowings and Capital Lease Obligations As of December 31, 2014, four capital leased Airbus A320 aircraft and two capital leased Airbus A321 aircraft were included in property and equipment at a cost of $253 million with accumulated amortization of $40 million. As of December 31, 2013, four capital leased Airbus A320 aircraft were included in property and equipment at a cost of $152 million with accumulated amortization of $33 mlin. The future minimum lease payments under these noncancelable leases are $23 million in 2015, $23 million in 2016, $23 million in 2017, $23 million in 2018, $23 million in 2019 and $98 million in the years thereafter. Included in the future minimum lease payments is $43 million representing interest, resulting in a present value of capital leases of $170 mi lion with a current portion of $15mlin and a long-term portion of $155 million. Note 3-Operating Leases We lease aircraft, all of our facilities at the airports we serve, office space and other equipment. These leases have varying terms and conditions, with some having early termination clauses which we determine to be the lease expiration date. The length of the lease depends upon the type of asset being leased, with the latest lease expiring in 2035. Total rental expense for all operating leases was $298 million in 2014, $295 million in 2013 and $284 million in 2012. As of December 31, 2014, 60 of the 203 aircraft in our fleet were leased under operating leases, with lease expiration dates ranging from 2016 to 2026..Our aircraft lease agreements contain termination provisions which include standard maintenance and return conditions. Our policy is to record these lease return conditions when they are probable and the costs can be estimated. Future minimum lease payments under noncancelable operating leases, including those described above, with initial or remaining terms in excess of one year at December 31, 2014, are as follows (in millions): Aircraft Other Total 2015.. $150 $ 85 80 65 60 57 487 235 170 2017 2018 2019.... Thereafter 90 75 75 58 213 135 115 700 Total minimum operating lease payments.......... .. . .. .. $661 $834 $1495 In the past we have entered into sale-leaseback arrangements with a third party lender for 45 of our operating aircraft. The sale-leasebacks occurred simultaneously with the delivery of the related aircraft to us from their manufacturers. Each sale-leaseback transaction was structured with a separate trust set up by the third party lender, the assets of which consist of the one aircraft initially transferred to it following the sale by us and the subsequent lease arrangement with us. Because of their limited capitalization and the potential need for additional financial support, these trusts are VIEs as defined in the Consolidations topic of the Codification and must be considered for consolidation in our financial statements. Our assessment of each trust considers both quantitative and qualitative factors, including whether we have the power to direct the activities and to what extent we participate in the sharing of benefits and losses of the trusts. JetBlue does not retain any equity interests in any of these trusts and our obligations to them are limited to the fixed rental payments we are required to make to them. These were ap and are reflected in the future minimum lease payments in the table above. Our only interest in these entities is the purchase options to acquire the aircraft as specified above. Since there are no other arrangements, either implicit or explicit, between us and the individual trusts that would result in our absorbing additional variability from the trusts, we concluded we are not the primary beneficiary of these trusts. We account for these leases as operating leases, following the appropriate lease guidance as required by the Leases topic in the Codification. ly $585 million as of December 31, 2014 REQUIRED What entry did JetBlue make to record rent payments on operating leases in 2014? What entry will be required in 2015? What is the total liability for leases that JetBlue reports in its 2014 balance sheet? How much of this liability is current? Noncurrent? Is this (total liability) amount representative of its obligations? Explain. JetBlue reported that it operated four aircraft under capital leases at the end of 2013. Assume that all these leases werestl in effect at the end of 2014. Prepare journal entries to record (i) new capital lease agreements signed during 2014, and(ii) depreciation of leased assets in 2014. Post your entries to T-accounts. Based on the information above, prepare the entry that JetBlue would make in 2015 to record lease payments on capital leases. Record your entry in the financial statement effects template and in journal entry form. Post your entry to T-accounts. Using a 4% discount rate. estimate the asset and liability that JetBlue would report if it capital- ized all of its operating leases. JetBlue reports long-term debt of $1,968 million in its 2014 ba ance sheet. Would this amount be affected substantially if operating leases were capitalized? a. b. c. d. e. f. Based on your calculations in part e, what journal entry would be necessary to record lease payments in 2015 if all of JetBlue's operating leases are capitalized at the end of 2014? C10-45. Interpreting Capital and Operating Leases JetBlue Airways Corporation reports the following leasing information in its 2014 10-K. Excerpt from Note 2-Long-term Debt, Short-term Borrowings and Capital Lease Obligations As of December 31, 2014, four capital leased Airbus A320 aircraft and two capital leased Airbus A321 aircraft were included in property and equipment at a cost of $253 million with accumulated amortization of $40 million. As of December 31, 2013, four capital leased Airbus A320 aircraft were included in property and equipment at a cost of $152 million with accumulated amortization of $33 mlin. The future minimum lease payments under these noncancelable leases are $23 million in 2015, $23 million in 2016, $23 million in 2017, $23 million in 2018, $23 million in 2019 and $98 million in the years thereafter. Included in the future minimum lease payments is $43 million representing interest, resulting in a present value of capital leases of $170 mi lion with a current portion of $15mlin and a long-term portion of $155 million. Note 3-Operating Leases We lease aircraft, all of our facilities at the airports we serve, office space and other equipment. These leases have varying terms and conditions, with some having early termination clauses which we determine to be the lease expiration date. The length of the lease depends upon the type of asset being leased, with the latest lease expiring in 2035. Total rental expense for all operating leases was $298 million in 2014, $295 million in 2013 and $284 million in 2012. As of December 31, 2014, 60 of the 203 aircraft in our fleet were leased under operating leases, with lease expiration dates ranging from 2016 to 2026..Our aircraft lease agreements contain termination provisions which include standard maintenance and return conditions. Our policy is to record these lease return conditions when they are probable and the costs can be estimated. Future minimum lease payments under noncancelable operating leases, including those described above, with initial or remaining terms in excess of one year at December 31, 2014, are as follows (in millions): Aircraft Other Total 2015.. $150 $ 85 80 65 60 57 487 235 170 2017 2018 2019.... Thereafter 90 75 75 58 213 135 115 700 Total minimum operating lease payments.......... .. . .. .. $661 $834 $1495 In the past we have entered into sale-leaseback arrangements with a third party lender for 45 of our operating aircraft. The sale-leasebacks occurred simultaneously with the delivery of the related aircraft to us from their manufacturers. Each sale-leaseback transaction was structured with a separate trust set up by the third party lender, the assets of which consist of the one aircraft initially transferred to it following the sale by us and the subsequent lease arrangement with us. Because of their limited capitalization and the potential need for additional financial support, these trusts are VIEs as defined in the Consolidations topic of the Codification and must be considered for consolidation in our financial statements. Our assessment of each trust considers both quantitative and qualitative factors, including whether we have the power to direct the activities and to what extent we participate in the sharing of benefits and losses of the trusts. JetBlue does not retain any equity interests in any of these trusts and our obligations to them are limited to the fixed rental payments we are required to make to them. These were ap and are reflected in the future minimum lease payments in the table above. Our only interest in these entities is the purchase options to acquire the aircraft as specified above. Since there are no other arrangements, either implicit or explicit, between us and the individual trusts that would result in our absorbing additional variability from the trusts, we concluded we are not the primary beneficiary of these trusts. We account for these leases as operating leases, following the appropriate lease guidance as required by the Leases topic in the Codification. ly $585 million as of December 31, 2014 REQUIRED What entry did JetBlue make to record rent payments on operating leases in 2014? What entry will be required in 2015? What is the total liability for leases that JetBlue reports in its 2014 balance sheet? How much of this liability is current? Noncurrent? Is this (total liability) amount representative of its obligations? Explain. JetBlue reported that it operated four aircraft under capital leases at the end of 2013. Assume that all these leases werestl in effect at the end of 2014. Prepare journal entries to record (i) new capital lease agreements signed during 2014, and(ii) depreciation of leased assets in 2014. Post your entries to T-accounts. Based on the information above, prepare the entry that JetBlue would make in 2015 to record lease payments on capital leases. Record your entry in the financial statement effects template and in journal entry form. Post your entry to T-accounts. Using a 4% discount rate. estimate the asset and liability that JetBlue would report if it capital- ized all of its operating leases. JetBlue reports long-term debt of $1,968 million in its 2014 ba ance sheet. Would this amount be affected substantially if operating leases were capitalized? a. b. c. d. e. f. Based on your calculations in part e, what journal entry would be necessary to record lease payments in 2015 if all of JetBlue's operating leases are capitalized at the end of 2014