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Problem 1, Jet Charters Company Jet Charters Company will enter into a lease agreement with Sky Equipment Co. where Jet Charters will make lease payments
Problem 1, Jet Charters Company Jet Charters Company will enter into a lease agreement with Sky Equipment Co. where Jet Charters will make lease payments over the next 6 years. The lease is noncancelable and requires payment will be January 1 of year 6, and Jet Charters will continue to use the asset until December equal annual payments of $25,000 per year beginning on January 1 of the first year. The last 31 of that year. Other important information includes the following: The fair value of the equipment is $180,000. The applicable discount rate is an 10 percent annual rate The economic life of the asset is 12 years. Jet Charters does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term. The asset is a standard piece of equipment. a) Is the lease an operating lease or a finance lease? b) What will be the lease expense shown on the income statement at the end of year 1? c) What will be the interest expense shown on the income statement at the end of year 1? d) What will be the amortization expense shown on the income statement at the end of year 1
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