Company A leases its equipment from Company B. In each of the following cases, assuming none of the other criteria for capitalizing leases are met, determine whether the lease would be cpaital lease or an operating lease un FASB Statement No. 13. The decision is to be based only on the terms presented, considering each case independently.
a. The lease requires payment of $9,000 per year in advance plus executory cost of $500 per year. the lease perios is 3 years, and Co. A 's incremental borrowing rate is 12%. The fair value of the equipment is $28,000.
b. The lease requires payments of $6,000 per year in advance, which includes executory costs of $500 per year. The lease period is 3 years, and Company A's incremental borrowing rate is 10%. The fair value of the equipment is $16,650.