1. A company leases manufacturing equipment. Management assembled the following data:

Lease term	5 years
Required payments	$31,000 at the beginning of each year
Equipment estimated fair value	$138,000 at the inception of the lease
Estimated useful life	8 years
Estimated salvage value	Zero

The company pays all executory costs directly to third parties. The lessor determines the annual rental payments in such a way that the rate of return that is earned is 10%. Assume that the company (the lessee) is privy to this information. The lease does not transfer title or contain a bargain purchase option.

Determine whether this lease should be classified as a capital lease or an operating lease. Display your analysis in detail below.

(Continuation of No. 3):

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