Problem 1 (35 points): International Lease Finance Corp (ILF) is one of the largest independent lessors specializing in developing property, plant, and equipment lease contracts. The following data are from TWO of the lease agreements the company entered: In January 1, 2017 (Note: the starting year is 2017), ILF (lessor) leased a new crane (i.e., equipment) to NEJ Construction (lessee) under a 5-year, non-cancelable contract. Terms of the lease require payments of $48,555 each January 1, starting January 1, 2017. The estimated fair value of the crane is expected to be $45,000 (unguaranteed) at the end of the lease term. The crane has an estimated life of 7 years, a fair value of $240,000, and a cost to ILF of $240,000 at January 1, 2017. The estimated residual value of the crane is $10,000 at the end of useful life. No bargain purchase or renewal options are included in the contract. Both ILF and NEJ adjust and close book annually at December 31. Collectability of the lease payment is probable. NEJ's incremental borrowing rate is 8%, and ILF's implicit rate of 8% is known to NEJ. NEJ uses historical cost method to depreciate all its fixed assets it owns on the straight-line basis. Lease Contract B: In January 1, 2018 (Note: the starting year is 2018), ILF (lessor) leased a building to Flynn Ltd. The following facts pertain to the lease agreement. 1. The term of the non-cancelable lease is six years. At the end of the lease term, Flynn has the option to purchase the building for $1,000 (bargain purchase price). 2. Terms of the lease require payments of $28,005 each January 1, starting January 1, 2018 3. The fair value of the building on January 1, 2018, is $150,000. 4. The building has an economic life of eight years, no residual value. Flynn's incremental borrowing rate is 6%. 5. Collectability of lease payment by the lessor is probable. 6. Flynn uses historical cost method to depreciate all its fixed assets on the straight- line basis. 7. Flynn adjusts and close book annually at December 31. Additional information on impairment test: 1. Contract A: There is no impairment loss of the equipment throughout the entire lease period. 2. Contract B: The valuer has provided the following information related to the building. Flynn performs an impairment test on the leased asset on a yearly basis. Assume the costs to sell are zero and the value-in-use is unknown. - Date December 31, 2018 Decembeats . 2018 Fair Value Fair Value $118,342 115,430 80,352 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 35,000 20,000 (a) Discuss the nature of Lease Contract A from the viewpoint of the ILF and explains in details the type of lease of this contract. Note: You have to check ALL conditions to receive full credit. (4 points) (b) Prepare ALL necessary journal entries for NEJ Construction (lessee) in 2017. (4 points) (c) Prepare ALL necessary journal entries for ILF in 2017.(3 points) (d) What is the nature of Lease Contract B from the viewpoint of the ILF? Identify the condition that supports your assessment. (3 points) (e) Prepare ALL the necessary journal entries for Flynn at December 31, 2018. Note: January 1, 2018 journal entries are unnecessary. (4 points) (f) Prepare ALL the necessary journal entries for ILF for 2018. Note: Prepare journal entries for BOTH lease contracts. Show your workings to receive full credit. (7 points) (g) Prepare the necessary journal entries for Flynn at December 31, 2019. Note: January 1, 2019 journal entries are unnecessary. (5 points) (h) At the end of the lease Contract A, the crane is reverted back to ILF. At January 2, 2022, the crane is sold by ILF for $44,000. Prepare the entries to record the sale. (2 points) (i) Then on December 31, 2023, at the end of the Lease Contract B, the bargain purchase option is exercised by Flynn (lessee). Prepare necessary journal entries related to the events of the exercise of the bargain purchase option. (3 points) Problem 1 (35 points): International Lease Finance Corp (ILF) is one of the largest independent lessors specializing in developing property, plant, and equipment lease contracts. The following data are from TWO of the lease agreements the company entered: In January 1, 2017 (Note: the starting year is 2017), ILF (lessor) leased a new crane (i.e., equipment) to NEJ Construction (lessee) under a 5-year, non-cancelable contract. Terms of the lease require payments of $48,555 each January 1, starting January 1, 2017. The estimated fair value of the crane is expected to be $45,000 (unguaranteed) at the end of the lease term. The crane has an estimated life of 7 years, a fair value of $240,000, and a cost to ILF of $240,000 at January 1, 2017. The estimated residual value of the crane is $10,000 at the end of useful life. No bargain purchase or renewal options are included in the contract. Both ILF and NEJ adjust and close book annually at December 31. Collectability of the lease payment is probable. NEJ's incremental borrowing rate is 8%, and ILF's implicit rate of 8% is known to NEJ. NEJ uses historical cost method to depreciate all its fixed assets it owns on the straight-line basis. Lease Contract B: In January 1, 2018 (Note: the starting year is 2018), ILF (lessor) leased a building to Flynn Ltd. The following facts pertain to the lease agreement. 1. The term of the non-cancelable lease is six years. At the end of the lease term, Flynn has the option to purchase the building for $1,000 (bargain purchase price). 2. Terms of the lease require payments of $28,005 each January 1, starting January 1, 2018 3. The fair value of the building on January 1, 2018, is $150,000. 4. The building has an economic life of eight years, no residual value. Flynn's incremental borrowing rate is 6%. 5. Collectability of lease payment by the lessor is probable. 6. Flynn uses historical cost method to depreciate all its fixed assets on the straight- line basis. 7. Flynn adjusts and close book annually at December 31. Additional information on impairment test: 1. Contract A: There is no impairment loss of the equipment throughout the entire lease period. 2. Contract B: The valuer has provided the following information related to the building. Flynn performs an impairment test on the leased asset on a yearly basis. Assume the costs to sell are zero and the value-in-use is unknown. - Date December 31, 2018 Decembeats . 2018 Fair Value Fair Value $118,342 115,430 80,352 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 35,000 20,000 (a) Discuss the nature of Lease Contract A from the viewpoint of the ILF and explains in details the type of lease of this contract. Note: You have to check ALL conditions to receive full credit. (4 points) (b) Prepare ALL necessary journal entries for NEJ Construction (lessee) in 2017. (4 points) (c) Prepare ALL necessary journal entries for ILF in 2017.(3 points) (d) What is the nature of Lease Contract B from the viewpoint of the ILF? Identify the condition that supports your assessment. (3 points) (e) Prepare ALL the necessary journal entries for Flynn at December 31, 2018. Note: January 1, 2018 journal entries are unnecessary. (4 points) (f) Prepare ALL the necessary journal entries for ILF for 2018. Note: Prepare journal entries for BOTH lease contracts. Show your workings to receive full credit. (7 points) (g) Prepare the necessary journal entries for Flynn at December 31, 2019. Note: January 1, 2019 journal entries are unnecessary. (5 points) (h) At the end of the lease Contract A, the crane is reverted back to ILF. At January 2, 2022, the crane is sold by ILF for $44,000. Prepare the entries to record the sale. (2 points) (i) Then on December 31, 2023, at the end of the Lease Contract B, the bargain purchase option is exercised by Flynn (lessee). Prepare necessary journal entries related to the events of the exercise of the bargain purchase option. (3 points)