Question - On January 1, 2015, Flying High Airlines leased a new airplane for a term of 10 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 Flying High makes annual payments of $650,000 beginning at the end of the first year (December 31, 2015). Flying High has an incremental borrowing rate of 4.5% and the fair market value of the airplane on January 1, 2015 is $6,250,000 (for simplicity, assume the lessor's implicit rate is greater than 4.5%).

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 $250,000.

a. What journal entries related to the lease arrangement should be recorded during 2015.

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 2015.