Question

On January 1, 2017, Logan Air Inc. enters into an eight year, non-cancellable lease agreement to lease an airplane to Atlantic Airlines, with payments required at the end of each year. The following information relates to this agreement:

1. Atlantic Airlines has the option to purchase the airplane for $7,000,000 at the end of the lease, at which time the airplanes fair value is expected to be $12,000,000.

2. The airplane cost Logan Air $30,000,000. It has an estimated useful life of fifteen years, and a residual value of zero at the end of that time (due to technological obsolescence).

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

4. Annual year-end lease payments of $4,562,337 will allow Logan Air to earn an 8% return on its investment.

Instructions

a. What type of lease is this for the lessor? Justify your answer. Assume Logan Air adheres to IFRS.

b. Prepare a lease amortization schedule for Logan Air for the first two years (2017 and 2018). Round all amounts to the nearest dollar.

c. Prepare the journal entries on Logan Airs books to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2017 and 2018.