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On January 1, 2020, Hawkeye Air leased a new airplane for 5 years. The expected life...

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Accounting

On January 1, 2020, Hawkeye Air leased a new airplane for 5years. The expected life of the airplane is 20 years. The leasestipulates that Hawkeye Air makes annual payments of $1,085,923payable at the beginning of each year. Hawkeye Air has anincremental borrowing rate of 4.3%. Hawkeye Air has an option torenew the lease with a 2% increase in the lease payment.

1) How will the lease be classified and how do you know?

1b) Calculate the present value of the lease payments.

2) What is the balance sheet impact of the lease at thebeginning of the lease (1/1/2020)?

2a) What is the income statement impact of the lease for2020?

2b) Identify any effects the lease arrangement and theassociated reporting would have on the statement of cash flows for2020.

Answer & Explanation Solved by verified expert
3.6 Ratings (388 Votes)
Answer 1 The lease is an operating lease It did not meet thr major criteria intended for a finance lease There was no transfer of ownership at the end nor a bargain purchase option and 5 yrs is not a major part of the 20 yr    See Answer
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