Lease Classification
Dianne Company signed a ten-year lease agreement on January 1, 2014. The lease requires pay- ments of $5,000 per year every December 31. Dianne estimates that the leased property has a life of 12 years. The interest rate that applies to the lease is 8%.
Required
1. Should Dianne Company treat the lease as an operating lease or a capital lease?
2. If a balance sheet is presented on January 1, 2014, what amounts related to the lease will appear on the balance sheet?
3. Assume that the leased asset is depreciated using the straight-line method. Assume that the lease is amortized using the effective interest method. What amounts should appear on the balance sheet of December 31, 2014?