Capital Lease Speedy Bus Service experienced a major increase in ridership in the last three months of 1999.

On January 1, 2000, Speedy entered into an agreement to lease four new buses from Transport Leasing Company.

Speedy provides all maintenance and repairs on the buses. The lease agreement on each bus requires Speedy to pay $12,000 on January 1, 2000, followed by fifteen annual pay- ments of $12,000 each, beginning with December 31, 2000.
At the end of the lease term, title to the buses transfers to Speedy. The buses have a useful life of 20 years and are depreciated on a straight-line basis with no anticipated salvage value. The lease is structured with a 10 percent interest rate.

a. Is the agreement a capital or operating lease? Explain your answer.

b. Assuming Speedy records the leases on the four buses as capital leases, compute the present value of the lease payments.

c. Present the amounts related to the lease that would appear in the income statements and balance sheets of Speedy Bus Service for the years 2000 and 2001.