Applying the capital lease criteria. Boeing manufactures a jet aircraft at a cost of $50 million. The usual selling price for this aircraft is $60 million, and its typical useful life is 25 years. American Airlines desires to lease this aircraft from Boeing. The parties contemplate the following alternatives for structuring the lease. Indicate whether each arrangement qualifies as an operating lease or a capital lease. Assume that all cash flows occur at the end of each year.

a. American Airlines will lease the aircraft for 20 ears at an annual rental of $6 million. At the end of 20 years, American will return the aircraft to Boeing. The interest rate appropriate to a 20-year collateralized loan for American Airlines is 10%.

b. American Airlines will lease the aircraft for 15 years at an annual rental of $7.2 million. At the end of 15 years, American Airlines will return the aircraft to Boeing. The interest rate appropriate for a 15-year collateralized loan for American Airlines is 10%.

c. American Airlines will lease the aircraft for 10 years at an annual rental of $5.5 million. At the end of 10 years, American Airlines has the option of returning the air craft to Boeing or purchasing it for $55 million. The interest rate appropriate for a 10-year collateralized loan for American Airlines is 8%.

d. American Airlines will lease the aircraft for 18 ears at an annual rental of $6.2 million, and will return the aircraft at the end of the lease term. In addition, American Airlines will pay a fee of $1,500 per hour for each hour over 5,000 hours per year that American Airlines flies the Aircraft. American airlines’ average usage of its aircraft is currently 6,200 hours per year. The interest rate appropriate for an 18-year collateralized loan for American Airlines is 10%.