On January 1, 2014, company ABC leased equipment to company XYZ. The following information pertains to the lease.

The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease

Equal rental payments are due on January 1 of each year, beginning in 2014

The fair value of the equipment on January 1, 2014 is $150,000, and its cost is $120,000

The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Company XYZ depreciates all of its equipment on a straight-line basis

Company ABC set the annual rental to ensure an 11% rate of return. Company XYZ's incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.

(Present value of $1 at 11% for 6 periods= 0.53464;

Present value of an annuity due at 11% for 6 periods = 4.6959;

Present value of an annuity due at 12% for 6 periods=4.60478)

Collectibility of lease payments is reasonably assured.

What type of lease is it for company ABC?

Finance lease

Operating lease

Sales-Type

Direct financing