Keller Corporation (the lessee) entered into an equipment lease with Dallo Company (the lessor) on January 1 of Year 1. Use the following information to decide whether this lease qualifies as an operating or capital lease for Keller, and give an explanation using the four classification criteria.
1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option.
2. The lease term is eight years and requires annual payments of $10,000 at the end of each year.
3. The fair value of the equipment at lease inception is $100,000. Assume that the present value of minimum lease payments is $50,000.
4. The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time.