Pepper, Inc, agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%

Present value interest factors are:

10% 12%

PVIF $1 10 periods 0.38554 0.32197

PVIF Annunity 10 periods 6.14457 5.65022

The pepper lease is a/an:

A) operating lease because the lease value is less than 90% of the fair value of the asset

B) capital lease because the lease value is 90% of the fair value of the lease

C) operating lease because the asset reverts to Blue at the end of the lease

D) capital lease because the lease term is more than 75% of the life of the asset