Reference no: EM132494504

February 1, 2020, Regal Air Inc. 8-year, non-cancellable lease agreement to lease an airplane to Atlantic Airlines, with payments required at the end of each lease year, starting February 1, 2021. The following information relates to this agreement:

1. Atlantic Airlines has the option to purchase the airplane at the end of the lease period:

Price to exercise                                                     $7,952,000

Leased asset's estimated fair value at of                    $11,360,000

2. Other key figures from the lease agreement are as follows:

Cost Regal Air to manufacture aircraft                        $31,331,250

Estimated useful life of aircraft (in years)                              16

3. Atlantic will pay all costs related to the leased airplane.

4. Regal Air wants to generate the following rate of return on the lease of this aircraft:  6%

5. Fair market value of leased aircraft on February 1, 2020                   $41,775,000

Required:

Question a) What type of lease is this for the lessor? Justify your answer. Assume Regal Air adheres to IFRS, and has a December 31 year end.

Question b) Calculate the amount of each annual year-end lease payment.

Question c) Regal Air for the first 2 years of the lease.

Question d) Prepare the journal entries on Regal Air's books for the 2020 and 2021 fiscal years.