On January 1, the president of KMF Inc. signed an eight-year lease agreement for retail space at a lease rate of \($50,000\) per year. During the negotiations, the president had learned that the lessor had built an implicit borrowing cost of ten percent per year into the lease contract. The agreement called for the lease payments to be made annually at the beginning of each year. Hence, the first payment of \($50,000\) was made immediately after the lease agreement was signed on January 1.

Required

1. Assume txhat the lease agreement is to be accounted for as a capital lease by KMF. How will the lease commitment be reflected on the company’s financial statements? At what value?

2. At the beginning of the second year of the lease, what financial effects will be recorded in the financial statements of KMF? At the beginning of the third year?

3. Which lease accounting treatment—operating lease versus capital lease—provides the most preferred income tax treatment (i.e., provides the greatest income tax benefits) to the company?

4. How would your answers to the above questions differ under the new lease accounting rules required beginning in 2019?