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:

\begin{array} { l c c } & \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \\\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \\\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022\end{array}

-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 asset.
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.

The Difference Between the Expense Charged with a Capital Lease

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