On January 1, 2014, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from Seven Seas

Question:

On January 1, 2014, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from Seven Seas Shipping Company at a price of $99,817,750. Overseas immediately leased the oil tankers to Pacific Ocean Oil Company (the lessee) on the same date. The lease calls for five annual payments of $25,000,000 to be made at each year-end. The tankers have a remaining useful life of five years with no , and the lease does not require the lessee to guarantee any residual value for the tankers. The lessor has structured the lease to earn a rate of return of 8.0%.

Required:
Prepare a schedule like the one appearing in Exhibit 12.8 of the text. This schedule should contain the year-to-year income statement and differences that would arise depending on whether this lease is accounted for as a direct financing lease or as an operating lease.

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