Question

Just need 2a and 2b answered. Already have number one. Just included in case you needed it for part two.

1. On January 1, 2020, Hawkeye Air leased a new airplane for a term of 8 years. The expected life of the airplane is 20 years. There are no rights to purchase the asset at the end of the term, no bargain purchase option, and no residual value guarantee. The lease stipulates that Hawkeye Air makes annual payments of $550,000 beginning at the end of the first year (December 31, 2020). Hawkeye Air has an incremental borrowing rate of 6% and the fair market value of the airplane on January 1, 2020 is $6,250,000 (for simplicity, assume the lessor’s implicit rate is greater than 6%).

a. What journal entries related to the lease arrangement should be recorded during 2020 (assume Hawkeye Air’s fiscal year end is December 31).

b. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.

c. What is the annual lease payment that results in a present value of minimum lease payments equal to 90% of the fair market value of the airplane ($6,250,000)?

2. Now assume that the lessor decided to require the lease payments at the beginning of the year as opposed to the end of the year. Also assume that the lease arrangement had a bargain purchase option under which the lessee could purchase the airplane at the end of the contract for $500,000.

a. What journal entries related to the lease arrangement should be recorded during 2020.

b. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2020.

Answer 1

Lease Liability
PV of Lease Payments
Lease Payment	550000
No of periods	8
Interest rate per period	6.00%
PV annuity due Factor @ 6% for 8 years	6.58238
PV of Lease Payments (550000* PV factor for annuity due)	3620310
PV of BPO of $500000 PV factor @ 6% for 8 years = ..62741)	₹ 3,13,706.19
PV of Minimum Lease Payments	3934016

Lease Amortisation Schedule
Date	Lease Payment	Interest Expense	Reduction in Liability	Lease Liability
01-01-2020				3934016
01-01-2020	550000.00		550000	3384016
01-01-2021	550000.00	203041	346959	3037057
01-01-2022	550000.00	182223	367777	2669280
01-01-2023	550000.00	160157	389843	2279437
01-01-2024	550000.00	136766	413234	1866203
01-01-2025	550000.00	111972	438028	1428176
01-01-2026	550000.00	85691	464309	963866
01-01-2027	550000.00	57832	492168	471698
31-12-2027	500000.00	28302	471698	0

Journal Entries - In Lessee Books
01-01-2020	Right to use Asset	3934016
	Lease Liability		3934016
	(To record Liability)
	Lease Liability	550000
	Cash		550000
	(To record lease payments)
31-Dec-17	Interest Expense	203041
	Interest Payable		203041
	( To record accrued interest)
	Amortization Expense	196701
	Right-to- Use Asset		196701
	(To record Amortization Expense (3934016/20)

Income Statement will report The Interest Expense of $203041 and Amortization Expense of $196701 (The asset is amorised to its life time of 20 years as there is a BPO)

Cash FLow for 2020 is the lease payment of $550,000

Balance sheet will show the

Lease liability @ $ 3384016 - See amortization Schedule

and Right to use asset @ (3934016 - 196701) = $3737315

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