On December 31 of the first year, a Company signed a five-year lease to take delivery of a new aircraft. The lease requires annual payments of $100,000 per year with the first payment due immediately. Company officials are unsure whether this contract is an operating lease or a finance lease.

	Questions to answer	Operating Lease	Financial Leasing
1.	What is reported as liability as of December 31 of year one? Explain.
2.	What is reported in the second year in the income statement? Explain

Each of the following statements refers to the lease agreement signed by Ajax Company in the information above. For each, indicate whether the statement is TRUE or FALSE.

	Statement	True or False
3.	If the lease is a finance lease, the company must determine the present value of the minimum lease payments using the company's incremental borrowing rate. Please explain.
4.	If the lease is a finance lease, the company must determine the present value of the minimum lease payments using the company's incremental borrowing rate. Please explain.
5.	If the aircraft has a useful life of six years, the company must record the contract as a finance lease. Please explain.
6.	If the lease is a finance lease, the company must depreciate the reported cost of the aircraft over five years. explain.