Question

On July 1, 2023, Air West Coast Ltd decided to lease an aircraft from Dubai Aerospace Enterprise, an enormous conglomerate in the aircraft leasing space who purchased the aircraft for cash. The term of the lease is 20 years. The implicit interest rate in the lease is 10 per cent. It is expected that the aircraft will be scrapped at the end of the lease term. The fair value of the aircraft at the commencement of the lease is $2,428,400. The lease is non-cancellable, Air West Coast Ltd returns the aircraft to Dubai Aerospace Enterprise at the end of the lease, Dubai Aerospace Enterprise requires a lease payment of $300,000 on the inception of the lease on July 1, 2023, and lease payments of $250,000 on June 30 each year, starting on June 30, 2024. There is no residual payment required.

Required

1. Provide the journal entries for the lease in the books of Air West Coast Ltd as at July 1, 2023.
2. Provide the journal entries for the lease in the books of Dubai Aerospace Enterprise as at July 1, 2023.
3. Provide the journal entries in the books of Air West Coast Ltd in the final year of the lease, i.e., in 20 years.
4. Provide the journal entries in the books of Dubai Aerospace Enterprise for the final year of the lease, i.e., in 20 years.

1. Provide the journal entries for the lease in the books of Air West Coast Ltd as at July 1, 2023. No post ref. required. Refer to the provided Chart of Accounts for the appropriate account names.

Marks: 4

General Journal – Air West Coast Ltd

Page 103

Date	Account	Post Ref	Debit	Credit
2023
	To record recognition of the leased asset
	To record lease payment

2. Provide the journal entries for the lease in the books of Dubai Aerospace Enterprise as at July 1, 2023. No post ref. required. Refer to the provided Chart of Accounts for the appropriate account names.

Marks: 6

General Journal – Dubai Aerospace Enterprise

Page 10

Date	Account	Post Ref	Debit	Credit
2023
	To record acquisition of the aircraft
	To record the substitution of a lease receivable for the aircraft
	To record receipt of the lease payment

Answer 1

Given Information

On July 1, 2023, Air West Coast Ltd decided to lease an aircraft from Dubai Aerospace Enterprise.

Lessor = Dubai Aerospace Enterprise

Lessee = Air West Coast Ltd.

Lease Term = 20 years (From 01/07/2013 to 30/06/2033)

Fair value of the aircraft at the commencement of the lease = $2,428,400

The lease payment at the inception of lease i.e. 01/07/2013 = $300,000

Net Lease liability = $2,428,400 - $300,000 = $2,128,400

Implicit interest rate of Lease = 10%

Lease payments of $250,000 is paid every year

Schedule showing the Lease Payments, Interest Expense and Lease Liability
Date	Interest Expense (10% of outstanding balance)	Lease Payment	Reduction in lease payable	Lease payable
(A)	(B)	(C)	(D) = (C) - (B)	(E)
01/07/2023	$	$	$	$2,128,400
30/06/2024	212,840 ($2,128,400 * 10%)	250,000	37,160	2,091,240 ($2,128,400 - $37,160)
30/06/2025	209,124 ($2,091,240 * 10%)	250,000	40,876	2,050,364 ($2,091,240 - $40,876)
30/06/2026	205,036	250,000	44,964	2,005,400
30/06/2027	200,540	250,000	49,460	1,955,940
30/06/2028	195,594	250,000	54,406	1,901,534
30/06/2029	190,153	250,000	59,847	1,841,688
30/06/2030	184,169	250,000	65,831	1,775,857
30/06/2031	177,586	250,000	72,414	1,703,442
30/06/2032	170,344	250,000	79,656	1,623,787
30/06/2033	162,379	250,000	87,621	1,536,165
30/06/2034	153,617	250,000	96,383	1,439,782
30/06/2035	143,978	250,000	106,022	1,333,760
30/06/2036	133,376	250,000	116,624	1,217,136
30/06/2037	121,714	250,000	128,286	1,088,850
30/06/2038	108,885	250,000	141,115	947,735
30/06/2039	94,773	250,000	155,227	792,508
30/06/2040	79,251	250,000	170,749	621,759
30/06/2041	621,76	250,000	187,824	433,935
30/06/2042	43,393	250,000	206,607	227,328
30/06/2043	22,733 ($227,328 * 10%)	250,000	227,267	61* (Approx. value is "0")

a. Journal entries for the lease in the books of Air West Coast Ltd (Lessee) as at July 1, 2023:

Date	Account Titles and Explanation	Debit	Credit
01/07/2023	Aircraft A/c   Dr.	$2,428,400
	To Dubai Aerospace Enterprise A/c   Cr.	$2,428,400
	(To record the recognition of leased asset and liability)

Date	Account Titles and Explanation	Debit	Credit
01/07/2023	Dubai Aerospace Enterprise A/c   Dr.	$300,000
	To Cash A/c   Cr.		$300,000
	(To record the lease payment)

b. Journal entries for the lease in the books of Dubai Aerospace Enterprise (Lessor) as at July 1, 2023:

Date	Account Titles and Explanation	Debit	Credit
01/07/2023	Aircraft A/c   Dr.	$2,428,400
	To Cash A/c   Cr.		$2,428,400
	(To record the acquisition of the aircraft)

Date	Account Titles and Explanation	Debit	Credit
01/07/2023	Air West Coast Ltd A/c    Dr.	$2,428,400
	To Aircraft on Lease A/c   Cr.		$2,428,400
	(To record the substitution of Lease receivable for air craft)

Date	Account Titles and Explanation	Debit	Credit
01/07/2023	Cash A/c   Dr.	$300,000
	To Air West Coast Ltd A/c    Cr.		$300,000
	(To record receipt of lease payment)

c. Journal entries in the books of Air West Coast Ltd in the final year of the lease, i.e., in 20 years:

Date	Account Titles and Explanation	Debit	Credit
30/06/2043	Interest Expense A/c    Dr.	$22,733
	Dubai Aerospace Enterprise A/c   Dr.	$227,267
	To Cash   A/c   Cr.		$250,000
	(To record the Final Lease installment i.e. 20 year)

d. Journal entries in the books of Dubai Aerospace Enterprise for the final year of the lease, i.e., in 20 years:

Date	Account Titles and Explanation	Debit	Credit
30/06/2043	Cash A/c Dr.	$250,000
	To Interest Income   A/c   Cr.		$22,733
	To Air West Coast Ltd A/c Cr.		$227,267
	(To record the receipt of installment for 20 year)