Madison, Inc. leased a machine from Louisville, Inc. The lease requires 24 annual payments of $60,000 which will be made at the end of each year. The lease contract specifies the rate implicit in the lease of 12% and a purchase option of $45,000 at the end of the twenty-fourth, even though the machines estimated value on that date is $120,000. Madison, Inc., is certain to exercise the purchase option. Madisons, Inc.s incremental borrowing rate is 14%.

Required:

1. Should this lease be classified as a finance lease or an operating lease? Why?
2. What amount should Madison, Inc. record as a lease liability at the beginning of the lease term?
3. How will this be recorded in the accounting records?