Reference no: EM131005379
Airway Leasing entered into an agreement to lease aircraft to Ouachita Airlines. Consider each of the following, a-e, to be independent scenarios.
a. The agreement calls for ownership of the aircraft to be transferred to Ouachita Airlines at the end of the lease term.
b. The fair value of the aircraft is expected to be $500,000 at the end of the lease term. Ouachita has the option to purchase the aircraft at the end of the lease term for $90,000.
c. The aircraft has a useful life of 20 years, and the term of the lease is 14 years.
d. The present value of the lease payments is $8,900,000 and the fair value of the leased aircraft is $10,000,000.
e. The aircraft was manufactured to meet specifications provided by Ouachita to optimize the exclusively regional nature of its flights.
Required:
1. In each scenario, indicate whether Ouachita would classify the lease as an operating lease or capital lease under U.S. GAAP. Assume the lease agreement has not met any of the other criteria of a capital lease. Provide brief explanations.
2. In each scenario, indicate whether Ouachita would classify the lease as an operating lease or finance lease under IAS 17. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations.
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