CA21-3 Lease Capitalization

(AICPA adapted CA21-3 Lessee Capitalization Criteria) On January 1, Santiago Company, a lessee, entered into three noncancelable leases for uipment to Santiago Compara at the end of the lease term. For each of the three leases, the present value at the beginning of the lease term of the minimum payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, is 75% of the fair value of the equipment The following information is peculiar to each lease. equipment. equipment. equipment the 1. Lease L does not contain a bargain-purchase option. The lease term, is equal to 80% of the estimated economic life ot 2. Lease M contains a bargain-purchase option. The lease term is equ 3. Lease N does not contain a bargain-purchase option al to 50% of the estimated economic life of the The lease term is equ al to 50% of the estimated economic life of the Instructions (a) How should Santiago Company classify each of the three leases above, and why? Discuss the rationale for your answer (b) What amount, if any, should Santiago record as a liability at the inception of the lease for each of the three leases above