Interpreting Capital and Operating Leases

- JetBlue Airways Corporation reports the following leasing information in its 2014 10-K.

Excerpt from Note 2Long-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 million. 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 mil-

lion with a current portion of $15 million and a long-term portion of $155 million.

Note 3Operating 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	$235
2016				90	80	170
2017				75	65	140
2018				75	60	135
2019				58	57	115
Thereafter				213	487	700
Total Minimum operating lease payments				$661	$834	$1,495

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 approximately $585 million as of December 31, 2014

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

a. What entry did JetBlue make to record rent payments on operating leases in 2014? What entry

will be required in 2015?

b. 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.

c. JetBlue reported that it operated four aircraft under capital leases at the end of 2013. Assume

that all these leases were still 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.

d. 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 nancial statement effects template

and in journal entry form. Post your entry to T-accounts.

e. 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 bal-

ance sheet. Would this amount be affected substantially if operating leases were capitalized?

f. Based on your calculations in part e, what journal entry would be necessary to record lease

payments in 2015 if all of JetBlues operating leases are capitalized at the end of 2014?