On 1st July 201x Large Mart requires additional equipment for the new store. The purchase price of the equipment is $140,000. However as Large Mart does not have sufficient cash resources it decides to enter into a lease agreement with Wise Ltd. The duration of the lease is 3 years, and the equipment has an expected useful life of 4 years. The lease contract requires Large Mart to pay $52,000 (via EFT) on 30th June of each year during the lease period starting 30 June 201x +1. The annual payment includes $2,000 to reimburse the lessor for costs associated with maintaining the equipment. The lease contract states that Large Mart can cancel the agreement at any time during the lease period, but Large Mart must pay an exit fee equal to 65% of the remaining lease liability if the lease contract is cancelled. The interest rate implicit in the lease is 10%.

At the end of the lease period, Large Mart will be able to purchase the equipment for a payment of $20,000. At that time to fair value of the equipment is $40,000. The equipment is depreciated using the declining balance depreciation method.

Question Determine whether the lessor of the equipment will be required to apply the accounting regulations for operating leases or finance leases AND PROVIDE A DETAILED EXPLANATION FOR YOUR DECISION.