Classifying Leases Tropical Products Inc. is in the process of negotiating a lease of equipment with a fair value of $50,000, and it must determine the proper lease classification.

The following table describes four scenarios under negotiation.

Option 1 Option 2 Option 3 Option 4 Ownership transfer No No No No Purchase option No No No $10,000 purchase option, considered a discounted price. Length of lease term, in years 4 3 4 3 Economic life of equipment, in years 5 5 5 5 No alternative use of equipment at lease end No No No No Annual lease payment $11,000 $11,000 $11,000 $11,000 Guaranteed residual value No No $15,000 No Implicit rate of lease Unknown to lessee Unknown to lessee 8.4% Unknown to lessee Incremental borrowing rate of lessee 8% 8% 8% 8% Payment type Beginning of period Beginning of period Beginning of period End of period Required For each of the four options, determine whether the lessee would classify the lease as operating or nance. Lease type for Option One Lease type for Option Two:Lease type for Option Three: Lease type for Option Four: