An airline operator signs an agreement to lease an aircraft for twenty years. Annual lease obligations, payable at the beginning of the year, are $4.7 million. What are the financial statement effects of this transaction if the lease is recorded as (a) a capital lease or (b) an operating lease? As a corporate manager, what forecasts do you have to make to decide which alternative to use? Which method would you prefer to use to report the lease? Why? As a financial analyst, what questions would you raise with the firm’s CEO?
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