Question

1. Cutthroat Aviation leased a Boeing 737 Max from Varden Leasing Services on January 1, 2019 in order to provide a short-term addition to its capacity. The lease term was 3-years, with annual payments of $4,250,000 due at the beginning of each year. Cutthroat does not know the interest rate implicit in the lease, but its own incremental borrowing rate is 5%. Varden Leasing had recently acquired the airplane from Boeing at a cost of $90 million, and is depreciating it over 30 years. a. Prepare the appropriate JEs for both Cutthroat Aviation and Varden Leasing on January 1, 2019, the beginning of the lease. b. Prepare an amortization schedule that shows the pattern of interest expense for Cutthroat Aviation over the lease term. c. Prepare all appropriate adjusting JEs for both Cutthroat Aviation and Varden Leasing as of December 31, 2019.

Answer 1

1.)	Cutthroat Aviation
	Date	Account Titles	Debit $	Credit $
	January 1,2019	Right of use asset	12,152,494
		Lease Liability		12,152,494
	January 1,2019	Lease Liability	4,250,000
		Cash		4,250,000
	Varden Leasing-
	Date	Account Titles	Debit $	Credit $
	January 1,2019	Cash	4,250,000
		Unearned lease revenue		4,250,000
	Working
	Present value of lease payments
	Date	Lease Payment $	PV Factor @5%	Present Value $
	January 1,2019	4,250,000	1	4,250,000
	January 1,2020	4,250,000	0.95238	4,047,619
	January 1,2021	4,250,000	0.90703	3,854,875
	Total	12,750,000		12,152,494

2.)	Date	Lease Payment $	Interest Expense @5%	Reduction in lease liability $	Lease Liability $
	January 1,2019	-	-	-	12,152,494
	January 1,2019	4,250,000	-	4,250,000	79,02,494
	January 1,2020	4,250,000	395,125	3,854,875	40,47,619
	January 1,2021	4,250,000	202,381	4,047,619
	Total	12,750,000	597,506	12,152,494

3.)	Cutthroat Aviation
	Date	Account Titles	Debit $	Credit $
	December 31,2019	Amortization Expense	4,050,831
		Right of use asset		4,050,831
		(12,152,494 / 3 )
	December 31,2019	Interest Expense	395,125
		Interest Payable		395,125
		(12,152,494 - 4,250,000 ) x 5%
	Varden Leasing-
	Date	Account Titles	Debit $	Credit $
	December 31,2019	Unearned lease revenue	4,250,000
		Lease Revenue		4,250,000
	December 31,2019	Depreciation Expense	3,000,000
		Accumulated Depreciation		3,000,000
		(90,000,000 / 30 )