RECORDING CAPITAL AND OPERATING LEASES Trippler Company has decided to lease its new office building. The following information is available for the lease:

Lease:

Payments $100,000 per year*

Length of lease 15 years Economic life of building 16 years Appropriate interest rate 8.4%

Cost of building if purchased $875,000

* The first payment is due at the end of the first year of the lease.

Required:

. Determine whether this is a capital lease or an operating lease.

. Regardless of your answer to the preceding question, assume that this is a capital lease and that the present value of the lease payments is $829,500. Record the liability and corresponding asset for this acquisition.

. Record the interest expense on the capital lease at the end of the first year. Also assume no residual value and a 15-year lease for the building. Record the first year’s straight-line depreciation of the cost of the leased asset.

Problem Set B