The 5 classification tests are the following (Yes or No with some explanation):

a) Does title pass?

b) Bargain Purchase Option (BPO)?

c) Term/EUL is greater than or equal to 75%?

d) PV/FV is greater than or equal to 90%?

e) No alternative use?

I tried to solve the questions myself, but there are still a lot of things I do not understand or confused. Please help.

Lessee accounting for operating leases: South Texas Frackers has an incremental borrowing rate of 5%. South Texas Frackers is considering the following lease to acquire a standard drill with fair value of $87,500 over 4 years. The lease will be signed on 1 January 2017 and payments are due at the end of each period. Other characteristics for each lease considered are: Lease Payments 18,000.00 Expected Residual Value 15,000.00 (Unguaranteed) Economic Life of Asset 8 years Will this lease be classified as a finance lease or as an operating lease? Clearly identify each of the 5 classification tests. CLEARLY state your conclusion. Prepare South Texas Frackers' journal entries for the first two years