Windemere Merchandising Corp., a public company, provides automobiles for its sales agents. The typical automobile has a retail value of $ 40,000 and in the past Windemere has purchased the automobiles, paying 10% on the financing. Now Windemere is considering leasing the automobiles instead, and has been offered one of two alternative lease arrangements. The lease arrangements would begin on June 1, 2021.
Alternative 1:
The automobile is leased for $ 320 per month on a one-year term, with renewal possible for a second year on similar terms. Each month's lease payment is due at the beginning of the month.
Alternative 2:
The automobile is leased for 5 years (60 months) with a $ 5,000 down payment and monthly payments of $ 675 due on the last day of each month. At the end of the 60 months, Windemere would have the option of purchasing the automobile for $ 1.
Instructions
a) For Alternative 1, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.
b) For Alternative 2, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.

Question

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The Answer of Windemere Merchandising Corp., a public company, provides automobiles for its sales agents. The typical automobile has a retail value of $ 40,000 and in the past Windemere has purchased the automobiles, paying 10% on the financing. Now Windemere is considering leasing the automobiles instead, and has been offered one of two alternative lease arrangements. The lease arrangements would begin on June 1, 2021.
Alternative 1:
The automobile is leased for $ 320 per month on a one-year term, with renewal possible for a second year on similar terms. Each month's lease payment is due at the beginning of the month.
Alternative 2:
The automobile is leased for 5 years (60 months) with a $ 5,000 down payment and monthly payments of $ 675 due on the last day of each month. At the end of the 60 months, Windemere would have the option of purchasing the automobile for $ 1.
Instructions
a) For Alternative 1, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.
b) For Alternative 2, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.