Problem

Lucas, Inc. enters into a lease agreement as lessor on January 1, 2018, to lease an airplane to National Airlines. The term of the noncancelable lease is 8 years and payments are required at the end of each year. The following information relates to this agreement:

1. National Airlines has the option to purchase the airplane for $12,002,700 when the lease expires at which time the fair value is expected to be $20,000,400.

2. The airplane has a cost of $51,002,200 to Lucas, an estimated useful life of 15 years, and a salvage value of zero at the end of that time (due to technological obsolescence).

3. National Airlines will pay all executory costs related to the leased airplane.

4. Annual beginning of year lease payments of $6,812,575 allow Lucas to earn an 10% return on its investment.

5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.

Prepare a lease amortization schedule for the lessor for the first two years (2018-2019).

Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize revenue, for 2018.