"Why do you say we would prefer our leases to be classified as operating leases?" says your colleague in the accounting department. "I thought that with the new lease accounting rules, both operating and finance leases have to be included in our balance sheet." To aid in your explanation, you use Excel to chart the effect on the income statement of accounting for an upcoming lease transaction as a finance lease and as an operating lease. The transaction you're using in your explanation is a lease of equipment requiring four $100,000 payments, payable at the beginning of each of the four years. The payments are based on an interest rate of 10%. It's already been determined that you must classify the lease as a finance lease because the equipment's useful life is estimated to be six years. but you see this as a good opportunity to compare the two approaches. Below are the questions you will ask your colleague to consider when viewing the charts. $600,000 Finance Lease $500,000 $400,000 $300,000 $200,000 $100,000 $0 1 2 3 Interest Expense Amortization Expense Total Expense Click here to open the graph(s) in a new tab. Required: $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Operating Lease 2 3 Interest Expense Amortization Expense Total Expense Answer is complete but not entirely correct. 1. 2. The interest expense of the finance lease in the third year of the four-year lease term is: The amortization expense of the finance lease over the four-year lease term is: 3. The amortization expense of the operating lease over the four-year lease term is: 4. The total lease expense of the finance lease over the four-year lease term is: 5. The total lease expense of the operating lease over the four-year lease term is: 6. Other things being equal, the advantage of a lease being classified as an operating lease rather than as a finance lease is: Higher than that of the operating lease. Increasing. Increasing. Increasing. Increasing. An operating lease results in a lower total amortization expense over the entire lease term.