Jing Leasing service recently purchased drilling equipment for $200,000 and wants to lease it to Huss Excavation Company. If Huss accepts, it will sign a lease agreement on May 1, 2019. The equipment has an estimated life of five years, and the lease term is for five years. During the period of the lease, Huss will be responsible for all repairs and maintenance of the drilling equipment. The lease agreement calls for Huss to make five annual lease payments of $56,227.41 starting May 1, 2019. The interest rate is 9 percent. Huss has asked you to help plan for the impact of this lease.

Required:

A. What makes this lease qualify as a capital lease?
B. What will be the value of the equipment and the amount of the liability when the lease is signed?
C. What will be the cash flows associated with the equipment for the first two years of the lease?
D. What will be the interest cost incurred in each of the first two years of the lease?
E. What is the balance in the lease liability account after the second payment on the lease?
F. If the leased asset had a life of 10 years and the lease terms call for five annual payments of $10,000, how would your answer to B above be different? Why?