Problem 16-20 Capital lease or operating lease [LO16-4]

The Deluxe Corporation has just signed a 132-month lease on an asset with a 16-year life. The minimum lease payments are $1,200 per month ($14,400 per year) and are to be discounted back to the present at a 6 percent annual discount rate. The estimated fair value of the property is $150,000. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume the lease is set up as an annual lease.

a. Calculate the lease period as a percentage to the estimated life of the leased property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. Calculate the present value of lease payments as a percentage to the fair value of the property. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

c. Should the lease be recorded as a capital lease or an operating lease? (Use criteria 3 and 4 for a capital lease.)

	Capital lease
	Operating lease