Earl owns a bread bakery and has signed a three-year lease with ABC Restaurant Supply for a bread oven. The retail value (present value) of the bread oven is $5,000, and Earl agrees to pay $1,000 each year for using the oven and another $100 a year as interest. At the end of the three-year lease, Earl can buy the oven for $3,000 (the estimated market value in three years) or return it to ABC at his option. The useful life of the oven is five years. The oven is expected to contribute an additional $2,000 each year to Earls net income after accounting for all other labor and material costs to make the bread.

1. Is this a finance lease, or an operating lease? 2. In your own words, in 250 words or more explain what criteria you used to determine the nature of this lease. Cite your source.

3. If the PV of the oven is $4300 at the beginning of the lease, does this change your determination? Why or why not?