Assume that United Airlines is planning to purchase a jet passenger plane, with a price of $45,636,480, from the Boeing Company. United is considering structuring the transaction in one of two ways. In Alternative 1, United would borrow the necessary cash from Federal City Bank and sign a note requiring payments of $6 million at the end of each year for fifteen years. The proceeds from the loan would then be used to purchase the airplane. In Alternative 2, United would lease the airplane from Boeing and make annual lease payments of $6 million for fifteen years, at which time it could purchase the airplane from Boeing for a nominal sum. United depreciates its aircraft over a useful life of fifteen years using the straight-line method. REQUIRED:

a. Determine the effective interest rate on the note and the lease arrangement.

b. Provide the journal entries that would be recorded under Alternative 1 to reflect the bor¬ rowing and the purchase of the airplane.

c. Provide the journal entry that would be recorded under Alternative 2 when the lease agree¬ ment is signed, if the lease is treated as a capital lease.

d. Compare the effects on the financial statements caused by

(b) and (c).

e. Provide the journal entry that would be recorded under Alternative 2 when the lease agree¬ ment is signed, if the lease is treated as an operating lease.

f. Which of the three alternative treatments (borrowing, capital lease, operating lease) could be considered off-balance-sheet financing? Explain why United might want to structure the transaction in this way