On January 1, 2010, Magnum Company Leased Equipment for 8

Multiple Choice

On January 1, 2010, Magnum Company leased equipment for 8 years. The agreement required annual payments of $65,000 at the end of each year. The cost value and the fair value of the lease equipment were $100,000 and
$291,675.90, respectively. The estimated residual value of the lease equipment was $35,000 at the end of the lease, which was not guaranteed by the lessee. The estimated economic life of the leased equipment was 10 years. The lease payments were determined at an amount such that the lessor earned a 15% annual rate of return over the lease period. The leased equipment was returned to the lessor at the end of the lease. Based on the given information, how should the lease be classified?

A) It should be classified as an operating lease.
B) It should be classified as a sales-type lease.
C) It should be classified as a direct-financing lease.
D) It should be classified as a leveraged lease.