Mika Company Leases Telecommunication Equipment

Mika company leases telecommunication equipment.Assume the following data for equipment leased from Phlash Company.The lease term is 5 years and requires equal rental payments of ¥3,150,000 at the beginning of each year.The present value of the payments was ¥13,135,059.The equipment has a fair value at the inception of the lease of ¥13,900,000, an estimated useful life of 8 years, and no residual value.Mika pays all executory costs directly to third parties.Phlash set the annual rental to earn a rate of return of 10%, and this fact is known to Mika.The lease does not transfer title or contain a bargain-purchase option.Based on this information, which of the following statement is true?

A) The lease should be classified as an operating lease.
B) The lease meets the economic life test to be classified as a finance lease.
C) The lease should be classified as a finance lease based on passing the recovery of investment test.
D) The lease is classified as an operating lease for Mika and a finance lease for Phlash.