An Airline Has the Following Data About an Airplane: Annual

question 173

Multiple Choice

An airline has the following data about an airplane: Annual lease cost $10,000,000
Lease term: 20 years
Useful life of airplane: 25 years
Fair market value of leased asset: $85 million
Present value of lease payments: $75 million
Bargain purchase option: None
Transfer to lessor at end of lease? Yes
Is this a capital or operating lease and why?

• A)This is an operating lease.It fails all the capital lease tests.
• B)This is a capital lease because the substance of the transaction is a capital lease.
• C)This is a capital lease because it meets at least one of the four tests.
• D)This is a capital lease because the leased asset costs over $1 million.

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Definitions:

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