Leases Southern Airlines has leased an aircraft from BAL Aircraft Company. The annual payments are $1,000,000,...

Leases Southern Airlines has leased an aircraft from BAL Aircraft Company. The annual payments are $1,000,000, and the life of the lease is 18 years. It is estimated that the useful life of the aircraft is 20 years. The present value of the future lease payments is $8,755,630. Conceptual Connection: Would Southern Airlines record the lease as an operating or capital lease? Why?

Expert Solution

Would Southern Airlines record the lease as an operating or capital lease?

Southern Airlines would record the lease as a capital lease.

Why?

Lessee must meet just one condition to capitalize :

* Ownership transfers at end of lease.

* Written option for bargain purchase.

Lessee has the option to purchase the asset from the lessor at a price which is estimated to be 50% or less than the asset's then fair value.

* 90% of leased property Fair value < Present value of future minimum lease payments.

Lessee is committing to pay a lot of money (heavily investing in the asset)

* 75% of asset economic life is being committed in lease term.

Lessee is using the asset for most of its life.

-----------

As more than 75% of the asset economic life is being committed in the lease term (75% of 20 years is 15 years and the asset is leased for more than 15 years), Southern Airlines would record the lease as a capital lease.

ekkarill92 answered 1 year ago

2016, ABC Company leased a copier from XYZ. The three-year lease agreement specifies annual payments of...

2016, ABC Company leased a copier from XYZ. The three-year lease agreement specifies annual payments of $50,000 beginning January 1, 2016, the inception of the lease, and at each January 1 thereafter through 2018. The useful life of the copier is estimated to be ten years. Before deciding to lease, ABC considered purchasing the copier for its cash price of $230,000. If funds were borrowed to buy the copier, the interest rate would have been 8%. ABC Company paid a...

Costco leased equipment from Cat Company under a four-year lease requiring equal annual payments of $170,000,...

Costco leased equipment from Cat Company under a four-year lease requiring equal annual payments of $170,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and a $1,000 guaranteed residual value. If Costco, incremental borrowing rate is 8%, what is the amount recorded for the asset at the lease inception? $615,533 $592,765 $608,842 $569,937 Which of the following would be considered...

Wondershade Company leased equipment from Saturnetworks on January 1, 2014. Lease Term 3 years Annual Payments...

Wondershade Company leased equipment from Saturnetworks on January 1, 2014. Lease Term 3 years Annual Payments $40,000 on January 1 each year Life of asset 3 years Implicit Interest Rate 8% Incremental Rate 8% PV, annuity due, 3 periods, 8% 2.7833 PV, ordinary annuity 3 periods, 8% 2.5771 There is no expected residual value. Prepare a completed amortization table. Prepare appropriate journal entries for Wondershade Company for 2014 and 2015. Assume straight-line depreciation and a December 31 year-end. There should...

Carla Vista, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments...

Carla Vista, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $294152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Carla Vista, Inc.’s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Carla Vista, Inc.) is 8%. Assuming that this lease is properly...

Transaction Analysis and Trial Balance BC Back-Country Airlines, Inc., operates leased amphibious aircraft and docking facilities,...

Transaction Analysis and Trial Balance BC Back-Country Airlines, Inc., operates leased amphibious aircraft and docking facilities, equipping the firm to transport campers and hunters from British Columbia, Canada, to outpost camps owned by various resorts. On August 1, the firm's trial balance was as follows: BC BACK-COUNTRY AIRLINES, INC. Unadjusted Trial Balance August 1, 2016 Debit Credit Cash $83,400 Accounts Receivable 24,000 Accounts Payable $2,500 Notes Payable 3,800 Common Stock 80,000 Retained Earnings 21,100 Totals $107,400 $107,400 During August, the...

Bullwinkle Corp. leased medical equipment from Rocky Co., signing a lease agreement that stipulates annual payments...

Bullwinkle Corp. leased medical equipment from Rocky Co., signing a lease agreement that stipulates annual payments of $250,000 on January 1 of each year for a five-year period. The first payment is due at the signing of the lease transaction on 1/1/17. Rocky Co. set an implicit rate of 6% in the terms of the agreement, which is equal to the incremental borrowing rate of Bullwinkle Corp. Rocky has also stipulated a residual value of $400,000 at the end of...

A seller has offered you a $1,000,000 interest-only 5 year loan at 6% (annual payments), when...

A seller has offered you a $1,000,000 interest-only 5 year loan at 6% (annual payments), when market interest rates on such loans are 8% (also interest only). Basing your decision on market values (discount using market rate), how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer? A. Zero, by definition. B. $26,497 C. $79,854 D. $98,412

Scenario 1: Southern Company owns a building (Bldg. A) that is leases to others. Bldg. A's...

Scenario 1: Southern Company owns a building (Bldg. A) that is leases to others. Bldg. A's FV = $2,000,000 and its BV=$1,280,000 (OG cost of $2,600,000 less accumulated depreciation of $1,320,000). Southern exchanges this for a bldg. owned by the Eastern Co. (Bldg. B). Eastern also gives Southern $200,000 to complete the exchange 1)Assume the exchange has commercial substance, on Southern's book, a)The amount recorded into new asset will be: b)The amount of gain/loss on exchange will be: 2)Assumer the...

'Aircraft Weight Reduction' lead to save cost for airlines company. Explain deeply.

Corry Corp. leased equipment from First Corp. under a 4-year lease requiring equal annual payments of...

Corry Corp. leased equipment from First Corp. under a 4-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Corry’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Corry, Inc.) is 8%. Assuming that this lease is properly classified as a finance...

Question