Lucas, Inc. enters into a lease agreement as lessor on January 1, 2015, to lease an airplane to National Airlines. The term of the noncancelable lease is 8 years and all payments should be required at the beginning of the year. The following information relates to this agreement:

1. National Airlines has the option to purchase the airplane for $12,002,700 when the lease expires at which time the fair value is expected to be $20,000,400.

2. The airplane has a cost of $51,002to Lucas, an estimated useful life of 14 years, and a $12,000,000 salvage value (which is not guaranteed).

3. Annual lease payments of $7,172,753 are due at the beginning of each year, starting on January 1, 2015. Lucas uses an 8% interest rate to calculate the minimum lease payments.

4. Collectability of the payments is reasonably predictable and there are no important uncertainties surrounding the costs yet to be incurred by Lucas.

REQUIRED:

Prepare the following journal entries on the books of the lessor.

1. Explain why this is considered a capital lease AND show calculation on how the minimum lease payment of $7,172,753 was calculated.

2. January 1, 2015 to record the lease agreement and the first lease payment on January 1, 2015.

3. December 31, 2015 to record the interest accrual for 2015.