Weiming Li
Actg 493
Assignment #7
Question 1.
1)
a. Both of two company can classify the lease as a capital lease.
Southwest lease term is equivalent to the useful life of its airplanes which is 20 years, in
comparison to the estimated economic life of the assets, the terms of lease is more than 75%
and therefore should be categorized under capital.
Boeing Corporation on the other hand deals with a sales-type lease but leasing its airplanes
at a higher price than the manufacturing costs involved in making them. In addition, the
uncertainty involved in collecting the lease payments on the airplanes plays a factor in the
classification of the lease.
Because of that, calculating PV of the minimum lease payment: Borrowing rate is at 12%
while implicit rate is at 10%, thus PVAD of $25,000,000 for 20 years at 10% is
