Kleinfelder Company has decided to lease its new office building. The following information is available for the lease:

Lease:

Payments ..............$75,000 per year*

Length of lease ...........15 years

Economic life of building .......16 years

Appropriate interest rate .........7.3%

Cost of building if purchased .......$750,000

* The first payment is due at the end of the first year of the lease.

Required:

1. Determine whether this is a capital lease or an operating lease.

2. Regardless of your answer to the preceding question, assume that this is a capital lease and that the present value of the lease payments is $740,000. Record the liability and corresponding asset for this acquisition.

3. Record the interest expense on the capital lease at the end of the first year. Also assume no residual value and a 15-year lease for the building. Record the first year’s straight-line depreciation of the cost of the leased asset.