Assume that the Trans Western Airlines Company is about to sign a lease for 15 years to acquire the use of a new airplane. The interest rate used to compute the lease payments, which are to be made annually at the end of each year, is 12 percent per year. At the start of the lease, the present value of the lease payments is to be \(\$ 30\) million.

I Verify that the annual lease payment is \(\$ 4,404,730\).

\(\mathrm{b}\) Assuming that the lease is accounted for as an operating lease, compute:

(i) Total rent expense over 15 years.

(ii) Rent expense for the first year.

(iii) Rent expense for the fifteenth year.

c Assuming that the lease is accounted for as a capital lease, and that amortization is straight-line, compute:

(i) Total expense related to using the asset over 15 years.

(ii) Expense relating to using the asset in the first year.

(iii) Expense relating to using the asset in the fifteenth year. (Hint: Refer to footnote 10, p. 386, where the method of deriving the last row of an amortization table is given.)

d Which method of accounting for the lease, operating or capital, is Trans Western Airlines Company likely to prefer for its financial statements and why?

e Assume that the airplane's fair value in the hands of the lessor is \(\$ 30\) million. What is the largest annual lease payment that Trans Western Airlines Company could make to the lessor for 15 years without disqualifying the lease from operating lease treatment in financial statements?