Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For

each situation, what is the appropriate lease classification by the lessee and required why.

Situation

1 2 3 4

Lease term (Years) 4 4 4 4

Asset's useful life (years) 6 5 6 6

Asset's fair value $44,000 $43,000 $41,000 $39,000

Purchase option that is reasonably

certain to be exercised? No Yes No No

Annual lease payments Beg. of yr. End of yr. Beg. of yr. End of yr.

Lessor's implicit rate (known by lessee) 5% 6% 5% 6%

Lessee's incremental borrowing rate 5% 5% 5% 5%