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ATP Corp. signs a lease agreement dated January 1, 2016 with Gilly Inc, for equipment. The lease terms, provisions, and related information follows:

* The lease term is 5 years. The lease is non cancelable and requires equal payments of $34,400 at the end of each year

* The lease does not contain any renewal or transfer of ownership but it does contain a bargain purchase option for $1,000 to be paid at the end of the lease term.

* The equipment has a fair value of $137,500, and does not have a residual value. The economic useful life of the asset is 6 years

* The impact interest rate for the lease is 12% and ATP is aware of the rate.

* Gilly Inc commonly leases similar equipment to other companies.

(only one of the PV below is one we use, use to correct PV factor):

PV factor for an ordinary annuity (n=5, I=12%) 3.60478

PV factor for an annuity due (n=5, I =12%) = 4.03735

PV factor pf $1 (n=5, I=12%)= 0.56743

Required: (show work)

a. Using the five criteria reguired for capitalization determine whether the lease is an operating lease or a capital lease. You must go through all 5 criteria with calculations before reaching a conclusion. Be sure to identify lease classification (operating or finance)

b. Calculate the amount of the asset and liability for lease at inception of the lease

c. Prepare all journal entries required at lease commencement on January 1, 2016.

d. Prepare all journal entries required on December 31,2016

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