Lahiri Leasing purchased a single-engine plane for $580,000 and leased it to Red Baron Flying Club for its fair value of $685,464 on January 1, 2024. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Terms of the lease agreement and related facts were a. Eight annual payments of $120,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 through 2030. Red Baron knows that Lahiri Leasing's implicit interest rate was 11%. The estimated useful life of the plane is eight years. Payments were calculated as follows: Amount to be recovered (fair value) Lease payments at the beginning of each of the next eight years: ($685,464 ÷ 5.7122*) *Present value of an annuity due of $1: n = 8, /= 11% b. Red Baron's incremental borrowing rate is 12%. $ 685,464 $ 120,000 c. Incremental costs of consummating the completed lease transaction incurred by Lahiri Leasing were $18,746. Required: 1. How should this lease be classified (a) by Lahiri Leasing (the lessor) and (b) by Red Baron (the lessee)? 2. Prepare the appropriate entries for both Red Baron Flying Club and Lahiri Leasing on January 1, 2024. 3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. 4. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2024 (the second lease payment). Both companies use straight-line depreciation or amortization. 5. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2030 (the final lease payment).
Lahiri Leasing purchased a single-engine plane for $580,000 and leased it to Red Baron Flying Club for its fair value of $685,464 on January 1, 2024. Note: Use tables, Excel, or a financial calculator. (FV of $1. PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Terms of the lease agreement and related facts were a. Eight annual payments of $120,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 through 2030. Red Baron knows that Lahiri Leasing's implicit interest rate was 11%. The estimated useful life of the plane is eight years. Payments were calculated as follows: Amount to be recovered (fair value) Lease payments at the beginning of each of the next eight years: ($685,464 ÷ 5.7122*) *Present value of an annuity due of $1: n = 8, /= 11% b. Red Baron's incremental borrowing rate is 12%. $ 685,464 $ 120,000 c. Incremental costs of consummating the completed lease transaction incurred by Lahiri Leasing were $18,746. Required: 1. How should this lease be classified (a) by Lahiri Leasing (the lessor) and (b) by Red Baron (the lessee)? 2. Prepare the appropriate entries for both Red Baron Flying Club and Lahiri Leasing on January 1, 2024. 3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club. 4. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2024 (the second lease payment). Both companies use straight-line depreciation or amortization. 5. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2030 (the final lease payment).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Lahiri Leasing purchased a single-engine plane for $580,000 and leased it to Red Baron Flying Club for its fair value of $685,464 on
January 1, 2024.
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Terms of the lease agreement and related facts were
a. Eight annual payments of $120,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 through
2030. Red Baron knows that Lahiri Leasing's implicit interest rate was 11%. The estimated useful life of the plane is eight years.
Payments were calculated as follows:
Amount to be recovered (fair value)
Lease payments at the beginning of each of the next eight years:
($685,464 + 5.7122*)
*Present value of an annuity due of $1: n=8, /= 11%
b. Red Baron's incremental borrowing rate is 12%.
$ 685,464
$ 120,000
c. Incremental costs of consummating the completed lease transaction incurred by Lahiri Leasing were $18,746.
Required:
1. How should this lease be classified (a) by Lahiri Leasing (the lessor) and (b) by Red Baron (the lessee)?
2. Prepare the appropriate entries for both Red Baron Flying Club and Lahiri Leasing on January 1, 2024.
3. Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Red Baron Flying Club.
4. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2024 (the second lease payment). Both
companies use straight-line depreciation or amortization.
5. Prepare the appropriate entries for both Red Baron and Lahiri Leasing on December 31, 2030 (the final lease payment).
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education