Problem
Patriots Inc. is interested in leasing a new air compressor from Kraft's Athletic Shop. The new 2015 model is selling for $99,900. Patriots can lease the machine for 7 years, with annual payments of $15,300. The machine has a useful life of 9 years. If Patriots Inc. borrows money they pay 3.5 percent interest. There are 4 criteria that determine whether a lease is treated as a capital lease. Based on the percentage of the asset's useful life criteria, would the lease be classified as an operating lease or capital lease? Based on the present value of the lease payments criteria, would the lease be classified as an operating lease or capital lease ? Assume the lease is a CAPITAL LEASE. What would be the interest expense in the first two years? What would be the depreciation expense for each of the first two years?