On January 1, 2020, DDD Company enters into a 3-year noncancelable lease for equipment having an estimated useful life of 4 years and a fair value of $6,000,000. DDD incremental borrowing rate is 5%. DDD uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of 2,000,000 USD per year. 2. There is a guaranteed residual value of $500,000. a. What kind of lease is this (Capital or operating)? Why? b. Determine the Assets, Liabilities, Interest payment, Principal payment, Depreciation expense, and ending liability for the first year. c. What is the effect of using the capital lease method (compared to operating lease) on the firm's expense, income, tax, and CFO (in the early years). Explain.
