Reference no: EM132624132

In January 1, 2020, Sahali Air Inc. enters into an 8-year lease agreement to lease an airplane to Duoprop Airlines, with payments required at the end of each year. Sahali follows IFRS. The following information relates to this agreement:

1. Duoprop 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 Sahali Air $30,000,000. It has an estimated useful life of 15 years, and a residual value of zero at the end of that time (due to technological obsolescence).
3. Duoprop will pay all executory costs related to the leased airplane.
4. Annual year-end lease payments of $4,562,339.49 will allow Sahali Air to earn an 8% return on its investment.

Instructions

Problem 1: What type of lease is this for the lessor? Justify your answer.

Problem 2: write a lease amortization schedule for the lessor, Sahali Air, for the first two years (2020 and 2021). Round all amounts to the nearest dollar.

Problem 3: Prepare the journal entries on Sahali Air's books to record the lease agreement, to reflect payments received under the lease, and to recognize income for the years 2020 and 2021.