Question

1. Operating Lease – Lessee and Lessor. 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.
   1. Prepare the appropriate JEs for both Cutthroat Aviation and Varden Leasing on January 1, 2019, the beginning of the lease.
   2. Prepare an amortization schedule that shows the pattern of interest expense for Cutthroat Aviation over the lease term.
   3. Prepare all appropriate adjusting JEs for both Cutthroat Aviation and Varden Leasing as of December 31, 2019.

Answer 1

Answer

2 3 Lessee Books Workings: Year Year for discounting Annual Lease Instalments paid at the beginning of the year PV factor @5% Present Value of Min lease payments Value at which to be recorded as asset by lessee 4,250,000 1.00000 4,250,000 12,152,493 4,250,000 0.95238 4,047,615 2 4,250,000 0.90703 3,854,878 12,152,493 Amortization Schedule Repayment Schedule Finance Charges Year Reduction in Principal Amount / Annual Amortizatio Outstanding Payment n of ROU Liability 12, 152,493 4,250,000 4,250,000 7,902,493 4,250,000 3,854,875 4,047,617 4,250,000 4,047,617 0.00 0 0 1 395,125 202,383 2 3 597,508 12,750,000 12,152,492 Debit Credit 12,152,493 12,152,493 4,250,000 Operating Lease Lessee Books General Journal January 1, 2019 Right-of-Use Asset Lease Liability (To record the lease.) January 1, 2019 Lease Liability Cash (to record lease payment) December 31, 2019 Lease expense ('Amortization Expense) Right-of-Use Asset December 31, 2019 Lease expense (Interest Expense ) Lease Liability Cash 4,250,000 3,854,875 3,854,875 395,125 3,854,875 4,250,000

Lessor For Lessor the lease is classified as operating lease Date Accounts & Explanation Debit Credit 1-Jan-19 Cash 4,250,000 Unearned Lease revenue (to record recognition of revenue each period) 4,250,000 4,250,000 31-Dec-19 Unearned Lease revenue Lease Revenue 4,250,000 3,000,000 3,000,000 31-Dec-19 Depreciation Expense Accumulated Depreciation (To record the depreciation expense) (90000000/30 years)