Smith leases telecommunications equipment from Red Co. Assume the following data for equipment leased from Red Co. The lease term is 4 years and requires equal rental payments of $20,000 at the beginning of each year. The equipment has a fair value at the commencement of the lease of $100,000, an estimated useful life of 5 years, and no estimated residual value. Red set the annual rental to earn a rate of return of 8%, and this fact is known to Smith. The lease does not transfer title or contain a bargain purchase option, and is not a specialized asset. 1. How should Smith classify this lease? a. Operating Lease b. Guaranteed Lease C. Finance Lease d. Capital Lease 2. Smith would record a right-of-use asset of? a. $71,542 b. $83.400 C. $20,000 d. $100,000 3. The classifications of a lease by a lessee are a. operating and finance leases. b. operating, sales, and finance leases. C. operating and leveraged leases. d. None of these answers are correct. 4. Which of the following describes the lease-term test? a. If the lease term is 75% or more of the economic life, it is a finance lease. b. If the lease term is 90% or more of the economic life, it is a finance lease. C. If there is a bargain purchase option during the lease term, it is a finance lease. d. If the asset has an alternative use during the lease term, it is a finance lease. 5. a. In computing the present value of the lease payments, the lessee should use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor if the implicit rate is known to the lessee. d. use the implicit rate in all cases