Reference no: EM132772101

Question - Jet Aviation Ltd an Indian airline company requires passenger planes for its operations. Jet enters into a legal lease agreement with Boeing (an American based plane manufacturing company) to lease out airplanes. Boeing supplies planes to Jet on January 1, 2019, on a 5-year term against which Jet will pay an annual lease rental of $500,000 at the end of each year. Assume the implicit rate of interest is 10% and the present value factor of an annuity of five years at 10% interest is 3.790786. Jet uses a straight- line depreciation method to record depreciation expense related to this asset. The useful life of the plane is 6 years. Jet has the option to buy the planes at the termination of the lease period.

Required -

a. Try to do the accounting entries required by Burton Company for Year 1.

b. Compute and illustrate the effect on the income statement for the year ended December 31, Year 1, and for the balance sheet as of December 31, Year 1.

c. Construct a table showing payments of interest and principal made every year for the five-year lease term.

d. Construct a table showing expenses charged to the income statement for the five-year lease term if the equipment is purchased. Show a column for (1) amortization, (2) interest, and (3) total expenses.

e. Discuss the income and cash flow implications from this capital lease.