Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Situation 1 Situation 2 Situation 3 Situation 4
Lease term (years) 4 4 4 4
Asset's useful life (years) 6 6 5 6
Asset's fair value $132,000 $114,000 $129,000 $115,000
Bargain purchase option? No No Yes No
Annual lease payments Beg. of yr. End of yr. Beg. of yr. End of yr.
Lessor's implicit rate (known by lessee) 5% 6% 6% 5%
Lessee's incremental borrowing rate 5% 5% 5% 5%

Required:
For each situation, determine the appropriate lease classification by the lessee and indicate why?