Reference no: EM132653178

On January 1, 2018, Regal Air Inc. enters into an eight year, non-cancellable lease agreement to lease an airplane to Atlantic Airlines, with payments required at the end of each year. The following information relates to this agreement:

1. Atlantic Airlines has the option to purchase the airplane for $7,000,000 at the end of the lease, at which time the airplane's fair value is expected to be $12,000,000.

2. The airplane cost Regal Air $30,000,000. It has an estimated useful life of fifteen years, and a residual value of zero at the end of that time (due to technological obsolescence).

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

4. Annual year-end lease payments of $4,562,337 will allow Regal Air to earn an 8% return on its investment.

Instructions

Question a. What type of lease is this for the lessor? Justify your answer. Assume Regal Air adheres to IFRS.

Question b. Prepare lease amortization schedule for Regal Air for the first two years (2018 and 2019). Round all amounts to the nearest dollar.

Question c. Prepare the journal entries on Regal Air's books to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2018 and 2019.