Answer:
a. The journal entry would be as follows:
Debit Credit
December 31, 2017 Lease Rent Expense $650,000
Cash $650,000
b. The Lease rent expense of $ 650,000 will be reported on the 2017 income statement as an operating expense for computation of net operating income.
c. The annual lease payment that results in a present value ofminimum lease payments equal to 90% of the fair market value of the airplane is $710,883
Regarding The cash outflow of $ 650,000 will be reported in the Operating Activities section of the Statement of Cash Flows for the year ended December 31, 2017.
Explanation:
In order to know what journal entries related to thelease arrangement should be recorded during 2017, first we need to calculate the Present Value Annuity as follows:
Present Value Annuity = [1-(1+r)^-n]/r
=[1-(1+.045)^-10]/0.045 = $7.9127
Hence, Present value of the minimum lease payments = $ 650,000 x 7.9127 = $ 5,143,255
a. The journal entry would be as follows:
Debit Credit
December 31, 2017 Lease Rent Expense $650,000
Cash $650,000
b. The Lease rent expense of $ 650,000 will be reported on the 2017 income statement as an operating expense for computation of net operating income.
Regarding The cash outflow of $ 650,000 will be reported in the Operating Activities section of the Statement of Cash Flows for the year ended December 31, 2017.
c. In order to calculate the annual lease payment that results in a present value ofminimum lease payments equal to 90% of the fair market value of the airplane we would have to use the following formula:
Annual lease payments that would result in present value of minimum lease payments of 90 % of the fair market value of the airplane = $ (6,250,000 x 90% ) / 7.9127 = $ 710,883
