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a. using the five criteria required 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 the lease at inception of the lease.

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

5. Terms and provision of lease agreement for equipment between a Lessor and a Lessee dated January 1, 2016: a. The lease term is 4 years. The lease in noncancelable and requires equal payments of $20,000 at the beginning of each year. b. The cost, and also fair value, of the equipment at the inception is $125,000. The equipment has an estimated economic life of 10 years an has a zero estimated residual value at the end of this time. c. There is no guarantee of the residual value. d. The equipment reverts to the Lessor at the end of the 4 years. That is, the lease contains no bargain purchase option and no agreement to transfer ownership at the end of the lease. e. For the Lessee, the interest rate implicit in the lease is 15%. f. PV factors: i. Ordinary annuity (n=4, i=15%) = 2.85498 ii. Annuity due (n=4, i=15%) = 3.2823 iii. Present value $1 (n=4, i=15%) = 0.57175 S 5. Terms and provision of lease agreement for equipment between a Lessor and a Lessee dated January 1, 2016: a. The lease term is 4 years. The lease in noncancelable and requires equal payments of $20,000 at the beginning of each year. b. The cost, and also fair value, of the equipment at the inception is $125,000. The equipment has an estimated economic life of 10 years an has a zero estimated residual value at the end of this time. c. There is no guarantee of the residual value. d. The equipment reverts to the Lessor at the end of the 4 years. That is, the lease contains no bargain purchase option and no agreement to transfer ownership at the end of the lease. e. For the Lessee, the interest rate implicit in the lease is 15%. f. PV factors: i. Ordinary annuity (n=4, i=15%) = 2.85498 ii. Annuity due (n=4, i=15%) = 3.2823 iii. Present value $1 (n=4, i=15%) = 0.57175 S

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