Details of this Paper

Southwest Airlines Co. (NYSE:LUV), headquartered in Dallas, Texas, operates Southwest Airlines, a passenger airline. In May 2011, Southwest acquired AirTran...

Description

solution


Question

Southwest Airlines Co. (NYSE:LUV), headquartered in Dallas, Texas, operates Southwest Airlines, a passenger airline. In May 2011, Southwest acquired AirTran Airways. As of September 30, 2012, the Company serves 97 cities in 41 states, the District of Columbia, the Commonwealth of Puerto Rico, and six near-international countries.;Required;1) On January 1, 2011, Southwest and the Boeing Company (NYSE:BA), the aircraft manufacturer, entered into a lease agreement to lease 3 new Boeing 737-800 passenger airplanes. The lease term is 20 years, which is equal to the useful life of the airplanes. At the end of the lease term the equipment will have zero residual value and will be returned to Boeing. The lease specifies annual payments of $25 million beginning January 1, 2011, and then on January 1 of each year through 2030. Southwest's incremental borrowing cost is 12%. The implied interest rate used by Boeing in structuring the lease is 10%, which is known to Southwest. Boeing's cost to manufacture the airplanes is $190 million. Both Boeing and Southwest use the straight-line depreciation method. There is no uncertainty with collectability of the lease payments or any additional cost to Boeing after the delivery of the airplane upon the inception of the lease. Answer the following questions and show your work.;a. How should this lease be classified by Boeing and Southwest?;b. Show all the journal entries Southwest needs to prepare in 2011 and on January 1, 2012.;c. Show all the journal entries Boeing needs to prepare in 2011 and on January 1, 2012.

 

Paper#75201 | Written in 18-Jul-2015

Price : $22
SiteLock