4. [Analysis of lease terms] The Pallavi Company leases equipment (fair market value of $125,000) from Priyanka Corp. The lease contains a bargain purchase option and requires 14 annual minimum lease payments of $15,500 payable at the end of each year. The economic life of the equipment is 20 years. The lessee's borrowing rate is 10%, and the lessor's implicit rate is 8%.

a. Explain why Pallavi must capitalize this lease under U.S. GAAP.

b. Explain whether Pallavi must capitalize this lease under U.S. GAAP in the absence of the bargain purchase option.

c. Compute the amount at which Pallavi should capitalize the lease.

d. Select the number of years over which Pallavi should depre- ciate the leased equipment.

e. Discuss whether the absence of a bargain purchase option would change your answer to part d.