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. United 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 under the current/old rules. Assume that all cash flows occur at the end of each year.

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

    b. United Airlines will lease the aircraft for 15 years at an annual rental of $7.2 million. At the end of 15 years, United Airlines will return the aircraft to Boeing. The interest rate appropriate for a 15-year collateralized loan for United Airlines is 10%.      
c. United Airlines will lease the aircraft for 10 years at an annual rental of $5.5 million. At the end of 10 years, United Airlines has the option of returning the aircraft to Boeing or purchasing it for $55 million. The interest rate appropriate for a 10-year collateralized loan for United Airlines is 8%.

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

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