Question
On January 1, 2017, Burke Aerospace signs an 8-year, non-cancelable lease agreement to lease a hanger from Aero Castle Company. The following information pertains to
On January 1, 2017, Burke Aerospace signs an 8-year, non-cancelable lease agreement to lease a hanger from Aero Castle Company. The following information pertains to this lease agreement.
The agreement requires equal rental payments of $162,347 beginning on January 1, 2017.
The fair value of the building on January 1, 2017 is $1,100,000.
The building has an estimated economic life of 10 years, a guaranteed residual value of $50,000, and an expected residual value of $35,000.
Burke depreciates similar buildings on the straight-line method.
The lease is nonrenewable.
At the termination of the lease, the building reverts to the lessor and there is no purchase option.
Burke's incremental borrowing rate is 6% per year. The lessor's implicit rate is not known by Burke.
Required:
a)Concisely explain what type of lease this is to Burke and why it is that type of lease.
b)Calculate the amount of any lease liability and asset for Burke as of the lease inception date.
c)Prepare the journal entries for Burke for all of 2017.Burke's fiscal year began January 1 and ended December 31.Every entry must have an explanation and as part of it calculations must be shown.
d)Indicate what Burke must report on the income statement related to this lease for the year ended December 31, 2017.
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