operating lease commitments are the most frequently encountered example of an execut 566601

Operating lease commitments, are the most frequently encountered example of an executory contract. If American Airlines (American) needs additional aircraft to expand internationally, it could borrow the needed funds and purchase the aircraft. This arrangement places additional debt on the balance sheet. Instead, American signs an operating lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 12 years. The aircraft has an estimated service life of 18 years. American paints its name on the aircraft, uses the aircraft in operations, and makes the required lease payments. The assumption underlying an operating lease is that American receives benefits when it uses the aircraft, not when it initially signs the lease. That is, American has future benefits, not past or current benefits. Thus, American obtains financing for its flight equipment without showing a liability on the balance sheet.2