On January 1, 2016, Elvis Prestley Company leased several machines from B.B. King Corporation under a 4-year lease agreement. The lease calls for semiannual payments of $17,500 each, payable on June 30 and December 31 of each year. The machines were purchased by B.B. King for $135,000 and are expected to have a useful life of 6 years with no expected residual value.Straight-line depreciation method is used.If funds were borrowed to buy the machines, the interest rate would have been 12%.

REQUIRED:

Using the 4 Classification criteria below, state whether this is an operating lease or a capital lease by explaining and showing the necessary calculations for all 4 criteria.

Four Classification Criteria:

1. Does the agreement specify that ownership of the asset transfers to the lessee?

2. Does this agreement contain a bargain purchase option?

3. Is the lease term equal to 75% or more of the expected economic life of the asset?

4. Is the present value of the minimum lease payments equal to or greater than 90% of the fair value of the asset?

5. Operating Lease or Capital Lease?