Firm A leases a piece of equipment from Firm B on January 1, 2011. The lease term is for three years and is noncancelable. Firm A is required to make equal payments of $30,000 on Jan 1 2012, 2013 and 2014. At the end of the lease, the equipment is returned to Firm B and Firm B has not guaranteed any residual value. The cost and fair value of the equipment to Firm A is $100,000 and has an estimated economic life of five years. Firm A's incremental borrowing rate is 11% and the implicit rate that Firm B uses in the lease is 10%. This implicit rate is known by Firm A. Both firms report under US GAAP. Should this arrangement be treated as an operating lease or as a capital lease? Why? 2. Firm A leases a piece of equipment from Firm B on January 1, 2011. The lease term is for three years and is noncancelable. Firm A is required to make equal payments of $30,000 on Jan 1 2012, 2013 and 2014. At the end of the lease, the equipment is returned to Firm B and Firm B has not guaranteed any residual value. The cost and fair value of the equipment to Firm A is $100,000 and has an estimated economic life of five years. Firm A's incremental borrowing rate is 11% and the implicit rate that Firm B uses in the lease is 10%. This implicit rate is known by Firm A. Both firms report under US GAAP. Should this arrangement be treated as an operating lease or as a capital lease? Why? 2