Lease X contains no bargain purchase option, but the lease term is equal to 70% of the estimated economic life of the leased property. Lease Y transfers ownership of the property to the lessee at the end of the lease term, but the present value of the lease payments is equal to 75% of the fair value of the leased property. How should the lessee classify Lease X and Lease Y, respectively?

Select one:

a. Operating Lease, Capital Lease

b. Operating Lease, Operating Lease

c. Capital Lease, Capital Lease

d. Capital Lease, Operating Lease

A 12-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest and part represents a reduction in the net lease liability. Additionally, the asset is depreciated on the straight-line basis. The total combined depreciation and interest expense will:

Select one:

a. Be the same each year

b. Fluctuate each year depending on market interest rates

c. Decrease each year

d. Increase each year