NOTE: the Following Problem Requires Present Value Information

NOTE: The following problem requires present value information.
On January 1, 2012, Porter Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for:
A) Porter to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period.
B) The machinery has an estimated useful life of 6 years and no expected salvage value.
C) Porter uses the straight-line method of depreciation for all of its fixed assets.
D) Porter’s incremental borrowing rate is 8%.
E) The fair value of the asset at January 1, 2012 is $275,000.


Required:
1. Discuss whether Porter should account for the lease as an operating or capital lease and why.
2. Using the above information determine how the lease would affect Porter’s financial statements in 2013. Use the balance sheet equation below to show the effects.


C + N$A = L + CC + AOCI + RE