Leases:

 

Capital lease amortization and journal entries.

Windom Co. as lessee records a capital lease of machinery on January 1, 2008. The seven annual lease payments of $350,000 are made at the end of each year. The present value of the lease payments at 10% is $1,704,000. Windom uses the effective-interest method of amortization and sum-of-the-years'-digits depreciation (no residual value).

 

Instructions (Round to the nearest dollar.)

(a) Prepare an amortization table for 2008 and 2009.

(b) Prepare all of Windom 's journal entries for 2008.

 

 

 

 

 

Lessor accounting—direct-financing lease.

Jenks, Inc. enters into a lease agreement as lessor on January 1, 2008, to lease an airplane to National Airlines. The term of the noncancelable lease is eight 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 $9,000,000 when the lease expires at which time the fair value is expected to be $15,000,000.

2. The airplane has a cost of $38,000,000 to Jenks, an estimated useful life of fourteen 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 year-end lease payments of $5,766,425 allow Jenks to earn an 8% 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 Jenks.

 

Instructions

(a) What type of lease is this? Discuss.

(b) Prepare a lease amortization schedule for the lessor for the first two years (2008-2009). (Round all amounts to nearest dollar.)

(c) 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 income, for the years 2008 and 2009.