New World Enterprises adopted the policy of leasing as the primary method of selling its products. The company’s main product is a small jet airplane that is very popular among corporate executives. New World constructed such a jet for Corporate Air Company (CAC) at a cost of $6,456,239. Financing of the construction was at a 12% rate. The terms of the lease provided for annual advance payments of $985,630 to be paid over 15 years with the ownership of the airplane transferring to CAC at the end of the lease period. It is estimated that the plane will have a residual value of $950,000 at that date. The lease payments began on October 1, 2011. New World incurred initial direct costs of $100,000 in finalizing the lease agreement with CAC. The sales price of similar airplanes is $7,867,200.

Instructions:

1. Compute the amount of manufacturer’s profit that will be earned immediately by New World.

2. Prepare the journal entry to record the lease on New World’s books at October 1, 2011.

3. Prepare the journal entries to record the lease on New World’s books for the years 2011–2013 exclusive of the initial entry. New World’s accounting period is the calendar year.

4. How much revenue did New World earn from this lease for each of the first three years of the lease?