Question - On January 1, 2016, National Leasing Company and EastJet Airlines entered into a lease arrangement for National to lease a new luggage handling system to the airline company. The terms of the lease are as follows:
Economic life of the system is 12 years
Lease term 10 years
Normal selling price is $210,485
Unguaranteed residual value at the end of the lease term is $20,000
Annual lease payments to be made by EastJet are $30,000 and are due on the anniversary date of the lease. The first payment is due January 1, 2016 on the date the lease is signed.
EastJet Airlines is responsible for all maintenance, insurance and taxes.
National Leasing has determined that the collectability of lease payments is reasonably assured and that no additional costs will be incurred.
The interest rate implicit in the lease is 10%, which is known to EastJet.
EastJet Airlines has an incremental borrowing rate of 12%.
Both EastJet Airlines and National Leasing Company use straight line depreciation.
Both companies have October 31st year ends.
Required -
(a) Prepare all journal entries for National Leasing for the 2016-year including adjusting entries at the October 31, 2016 year end. Use the gross method.
(b) Prepare all journal entries for EastJet Airlines for the year 2016 including any adjusting entries at the October 31, 2016 year end.