As the recently hired junior accountant for Norman, Inc, you have just completed your initial review of the financial statements. During this review, you discover a used vehicle recently recorded as an operating lease. The lease agreement was entered into a year ago. You decide to review the lease agreement to ensure that the lease should be afforded operating lease treatment, and you discover the following:

1. Non-cancelable term of 4 years.
2. Rental of $3,240 per year (at the end of each year). (The present value at 8% per year is $10,731).
3. Estimated residual value of $1,100 is guaranteed.
4. Estimated economic life of the automobile is 5 years.
5. Norman's incremental borrowing rate is 8% per year.

Initial Post

In your discussion, evaluate the criteria for classification of the lease, and describe the nature of the lease.