Liesel Inc. is considering the following two separate leases. Each lease pertains to the lease of equipment with a fair value of $100,000.

	Lease One	Lease Two
Ownership of equipment transfers to lessee at lease-end	No	No
Lease includes a purchase option	No	Yes
Length of lease term	5	7
Economic life of the equipment	8	8
Alternative use of the equipment at lease-end	Yes	Yes
Annual lease payment, first payment due at end of each period.	$21,500	$18,000
Guaranteed residual value	$20,000	$0

Liesel Inc.s incremental borrowing rate is 7% and is not aware of the implicit rate of either lease. For Lease One, the lessee estimates an expected residual value of only $12,000 of the equipment at lease-end based on its expected usage.

How would Liesel Inc. classify Lease One and Lease Two?

Lease One Lease Two

Question 3 options:

	Finance lease Finance lease
	Operating lease Finance lease
	Operating lease Operating lease
	Finance lease Operating lease