We noticed that you made a large lease payment for a truck on February 1 this year. Is there a new long-term lease on a truck? If so, we will need a copy of the lease since we need to determine if this is another operating lease or if it is instead a finance lease. To determine that, we need to know the lease term, the interest rate on the lease, whether ownership will transfer at the end of the lease, and the useful life and fair value of the truck on the date of the lease.

On February 1, 20X3, we leased a third truck that is tooled to our specifications. Nick determined that due to the special tooling, we are better off in a lease situation this time, versus purchasing it and having to worry about selling it later. The estimated useful life of the truck is six years, the lease term is five years, and the interest rate is 5%. Nick and the dealer agreed on a price of $119,095. The truck will be returned to the dealer at the end of the lease with the understanding that we do not have to guarantee a residual value.

How would I calculate the amortization expense? What would the interest expense be? Would this be an operating lease or finance lease?