Question 2 (30 marks)

On January 1, Year 1, Sahali Air Inc. enters into an 8-year lease agreement to lease an airplane to Duoprop Airlines, with payments required at the end of each year. Sahali Air purchased the airplane in order to lease it to Duoprop. Sahali Air follows IFRS. The following information relates to this agreement:

1. Duoprop Airlines has agreed to purchase the airplane for $8,000,000 at the end of the lease.

2. The airplane cost Sahali Air $24,000,000. It has an estimated useful life of 20 years, and a residual value of zero at the end of that time.

3. Duoprop will pay all executory costs related to the leased airplane.

Instructions

1. What type of lease is this for the lessor? Justify your answer in one or two sentences.

2. Calculate the annual year-end lease payment that will allow Sahali Air to earn an 8% return on its investment.

3. Prepare a lease amortization schedule for the lessor, Sahali Air, for the full term of the lease. Use exact dollars and cents. To do this efficiently, you should prepare the amortization schedule on Excel and then copy it into your Word document.

4. Prepare all the journal entries for Sahali Air related to the lease for Year 1 and Year 2. Round journal entry amounts to the nearest dollar.