Xavier Corporation leases equipment with a useful life of ten years to Zero Incorporated. The operating lease requires annual payments of $1,500 over a three-year period without a renewal option. After two years, the two companies agree to extend a lease term by two years and increase annual payments to $1,750. What should happen because of this lease modification?

Multiple Choice

Both companies should treat the original lease as being terminated and account for the modification as a new lease.

The lease should be reclassified from an operating lease to a finance/sales-type lease.

What has been recorded by both companies must be adjusted to conform to the new terms of the contract.

All the answer choices are correct.