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On December 31 of the first year, a Company signed a five-year lease to take delivery of a new aircraft. The lease requires annual payments
On December 31 of the first year, a Company signed a five-year lease to take delivery of a new aircraft. The lease requires annual payments of $100,000 per year with the first payment due immediately. Company officials are unsure whether this contract is an operating lease or a finance lease.
Questions to answer | Operating Lease | Financial Leasing | |
1. | What is reported as liability as of December 31 of year one? explain. | ||
2. | What is reported in the second year in the income statement? explain |
Statement | True or False | |
3. | If the lease is a finance lease, the company must determine the present value of the minimum lease payments using the company's incremental borrowing rate. Please explain. | |
4. | If the lease is a finance lease, the company must determine the present value of the minimum lease payments using the company's incremental borrowing rate. Please explain. | |
5. | If the aircraft has a useful life of six years, the company must record the contract as a finance lease. Please explain. | |
6. | If the lease is a finance lease, the company must depreciate the reported cost of the aircraft over five years. explain.
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