ORIE_350_Homework__8_answers - ORIE 350 Homework#8 Due...

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ORIE 350 Homework #8 Due Thursday, March 29, 2007 1. Kato Airlines leases its planes. For a particular aircraft, a 20-year-old Beechcraft 1900C, Kato acquired the plane under a lease agreement with AeroLLoyd Financing and Leasing, paying AeroLLoyd $300,000 per year for 8 years. The aircraft was delivered on January 1, 2006. Lease payments were due quarterly, commencing March 31, 2006. The interest rate was 8%, and the appraised value of the plane was $1.2 million. Show the journal entries required on January 1, 2006 and March 31, 2006. Kato Airline’s interest rate was 8%. Find the present value of future lease payments. ( 29 32 1 1.02 PV 75,000 $1,760,125.11 0.02 - - = = Since this exceeds 90% of the fair market value, it is a capital lease. January 1, 2006 Leased Asset 1,760,125 Lease Obligation 1,760,115 March 31, 2006 Interest Expense 35,203 Lease Obligation 39,797 Cash 75,000 2. Rich Grocery owns the building it uses. It has a current book value of $450,000 on January 1, 2007, a 10-year remaining life, and no salvage value. On January 1, 2007, it was sold to Lucky Investors Inc. for $500,000 cash, and the two parties executed a 10- year lease with a 12% interest rate and payments at year end. a) Find the amount of the annual payments that Rich Grocery must make ( 29 10 500,000 A $88,492.08 1 1.12 0.12 - = = -
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b) Show the journal entries for the lessee at fiscal year end, December 31, 2007.
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