Lessor rents a building to Lessee for 5 years at an annual rental of $20,000. Lessor's cost of this building was $90,000 and the building has a life of 6 years. The applicable interest rate is 10%. There are no uncertainties regarding costs and collections.
(a) Is this a capital lease or operating lease? Why? Assume the annuity is an annuity due.
(b) If the rentals were only $12,000 per year, would your answer to part (a) be any different?
If the life of the building was 9 years, the annual rental was $12,000, and there was a BPO option, how would your answer to part (a)change?