Analyzing, Interpreting, and Capitalizing Operating Leases

On January $1,2020,$ Alexander Mack Adventures Inc. entered into land leases that grant unrestricted access to property in Texas where the company plans to build an RV resort. Lease details follow.

Lease term: $15$ years.

Upfront fees: $$450,000$ paid in cash.

Annual lease payment: $$550,000$ due at each year$-$end.

Lessee responsible for property tax and insurance.

The company also leased computer equipment with the following details.

Lease term: $4$ years.

Upfront fees: $$5,000.$

Annual lease payments: $$27,163.$

Lessee has option to purchase equipment for $$1$ at end of lease.

Required

Note: For the following questions, round your answers to the nearest whole dollar; use rounded amounts for further calculations.

a$.$ Given the lease contract facts, determine the classification for each of the two leases $($operating or finance$).$

Land lease: Answer

Computer equipment lease: Answer

b$.$ Determine the amount of the lease liability that Alexander Mack will add to its balance sheet at the inception of each lease. The company has a $9\%$ cost of debt capital.

Land lease: $Answer

$0$

Computer equipment lease: $Answer

$0$

c$.$ What asset will the company add to its balance sheet for each lease?