Find Southwest?s 10-K for the year ended December 31, 2010 in the SEC EDGAR database and use the information there to answer the following questions:

a. As of December 31, 2010, how many Boeing 737 aircrafts did Southwest have in its fleet? How many were accounted for as operating leases?

b. In Footnote 8 to the financial statements, the minimum lease payment schedule for operating leases is presented as follows:

(In millions)	Operating leases
2011	$	386
2012	414
2013	333
2014	285
2015	239
Thereafter	886
Total minimum lease payments	$	2,543

ACTG 493 Professor Siyi Li ACTG 493, SPRING 2016 INDIVIDUAL ASSIGNMENT #7 DUE: THURSDAY APRIL 21 This assignment includes two exercises. You do not need to use the memo format. 1. Leases Southwest Airlines Co. (NYSE:LUV), headquartered in Dallas, Texas, operates Southwest Airlines, a passenger airline. In May 2011, Southwest acquired AirTran Airways. As of September 30, 2012, the Company serves 97 cities in 41 states, the District of Columbia, the Commonwealth of Puerto Rico, and six near-international countries. Required: 1) On January 1, 2011, Southwest and the Boeing Company (NYSE:BA), the aircraft manufacturer, entered into a lease agreement to lease 3 new Boeing 737-800 passenger airplanes. The lease term is 20 years, which is equal to the useful life of the airplanes. At the end of the lease term the equipment will have zero residual value and will be returned to Boeing. The lease specifies annual payments of $25 million beginning January 1, 2011, and then on January 1 of each year through 2030. Southwest's incremental borrowing cost is 12%. The implied interest rate used by Boeing in structuring the lease is 10%, which is known to Southwest. Boeing's cost to manufacture the airplanes is $190 million. Both Boeing and Southwest use the straight-line depreciation method. There is no uncertainty with collectability of the lease payments or any additional cost to Boeing after the delivery of the airplane upon the inception of the lease. Answer the following questions and show your work. a. How should this lease be classified by Boeing and Southwest? b. Show all the journal entries Southwest needs to prepare in 2011 and on January 1, 2012. c. Show all the journal entries Boeing needs to prepare in 2011 and on January 1, 2012. 2) Find Southwest's 10-K for the year ended December 31, 2010 in the SEC EDGAR database and use the information there to answer the following questions: a. As of December 31, 2010, how many Boeing 737 aircrafts did Southwest have in its fleet? How many were accounted for as operating leases? b. In Footnote 8 to the financial statements, the minimum lease payment schedule for operating leases is presented as follows: (In millions) Operating leases 2011 $ 386 2012 414 2013 333 2014 285 2015 239 Thereafter 886 Total minimum lease payments $ 2,543 Assume the subtotal lease payments presented as 'Thereafter' will take place in 5 equal installments between 2016 and 2020. Assume all minimum lease payments are made on December 31 and the applicable discount rate is 10%. Suppose the new lease accounting rules kicked in and all leases needed to be capitalized. Calculate and compare the debt/equity (defined as total liabilities/stockholders' equity) ratios for Southwest using December 31, 2010 balances before and after the operating leases are capitalized. 1 ACTG 493 Professor Siyi Li 2. Equity method investments On January 4, 2010, Newcrest Gold Co. Ltd. paid $66 million for 3 million shares of Austin Mining Company common stock. The investment represents a 30% interest in the net assets of Austin and gave Newcrest the ability to exercise significant influence over Austin's operations. Newcrest uses the equity method to record the investment. Newcrest received dividends of $1.60 per share on December 6, 2010, and Austin reported net income of $32 million for the year ended December 31, 2010. The market value of Austin's common stock at December 31, 2010, was $23 per share. The book value of Austin's net assets was $160 million and: a) The fair market value of Austin's depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $16 million. b) The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Required: 1) Prepare all appropriate journal entries related to the investment during 2010. 2) What is the carrying amount of this investment on Newcrest's balance sheet as of December 31, 2010? 3) What's the effect of this investment on Newcrest's 2010 income before taxes? 2