On January 1, Plugs Company, a lessee, entered into three non-cancelable leases for new equipment, Lease L, Lease M, and Lease N. None of the three leases transfers ownership of the equipment to Plugs at the end of the lease term. For each of the three leases, the present value at the beginning of the lease term of the lease payments is 75% of the fair value of the equipment. The following information is specific to each lease.

Lease L does not contain a bargain purchase option. The lease term is equal to 80% of the estimated economic life of the equipment.

Lease M contains a bargain purchase option. The lease term is equal to 50% of the estimated economic life of the equipment.

Lease N does not contain a bargain purchase option. The lease term is equal to 50% of the estimated economic life of the equipment.

Required:

1. Please show the calculation(s)/discussion of the test you use to answer the following questions:

a. What type of lease is Lease L for the lessee?

b. What type of lease is Lease M for the lessee?

c. What type of lease is Lease N for the lessee?