Lucas, Inc. enters into a lease agreement as lessor on 1st January, 2013, to lease an airplane to National Airlines. The term of the non-cancelable lease is eight years and payments are needed at the end of each year. The subsequent information relates to this agreement:
1. National Airlines has the option to purchase the airplane for $12,000,000 when the lease ends at which time the fair value is expected to be $20,000,000.
2. The airplane has a cost of $51,000,000 to Lucas, the fair value is the same, an evaluated useful life of fourteen years, and a salvage value of zero at the end of that time (because of technological obsolescence).
3. National Airlines can pay all executory costs related to the leased airplane.
4. Annual lease payments of $7,746,572 are due 31st December, and allow Lucas to earn an 8 percent return on its investment.
5. Collectability of the payments is reasonably expected, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.
6. Lucas's fiscal year ends June 30. The company does NOT use reversing entries.
Requirements:
a. What kind of lease is this to Lucas? Describe.
b. Show how the lease payment was evaluated.
c. Purpose a lease amortization schedule for the lessor for the first 2 years (2013-2014). Round all amounts to the nearest dollar.
d. Purpose the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to identify income, through June 30, 2014.
e. Give all income statement and balance sheet line items and amounts for Lucas as of and for the year ended June 30, 2014.