Presented below are three different lease transactions in which Naylor Enterprises engaged in 2014. Assume that all lease transactions start on January 1, 2014. In no case does Naylor receive title to the properties leased during or at the end of the lease term.

Instructions

(a) Identify the leases above as operating or capital leases. Explain.

(b) How should the lease transaction for Mendenhall Co. be recorded on January 1, 2014?

(c) How should the lease transaction for Midas Inc. be recorded in 2014?

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Lessor Baxter Springs Co. Bulldozer None 4 years Mendenhall Co. Truck None 6 years Midas Inc. Type of property Bargain purchase option Lease term Estimated economic life Yearly rental Fair value of leased asset Present value of the lease rental payments Furniture None 3 years $ 3,000 8 years $13,000 $80,000 7 years $20,000 $96,000 5 years $20,500 $82,000 $ 9,000 $48,000