Henri Retail Stores is negotiating three leases for store locations. Henri's incremental borrowing rate is 12 percent. Each store will have an economic useful life of 30 years. Lease payments will be made at the end of each year. Based on the data below, properly classify each of the leases as an operating lease or a capital lease. The purchase price for each property is listed as an alternative to leasing.
|
|
Location Lease Term
|
Lease Payment
|
Purchase Price
|
|
Location A
|
26 years
|
$1,500,000
|
$12,000,000
|
|
Location B
|
20 years
|
1,300,000
|
10,000,000
|
|
Location C
|
20 years
|
1,400,000
|
15,000,000
|
Determine whether each of the leases should be classified by Henri as an operating lease or a capital lease. Show computations and reasons to support your answers.
|
(1)
|
Location A
|
|
(2)
|
Location B
|
|
(3)
|
Location C
|