Belangier Corporation has signed two leases in the past year. One lease is for handling equipment, the other for a truck.

HANDLING EQUIPMENT:

The handling equipment has a fair market value of \(\$ 274,000\). Lease payments are made each 2 January, the date the lease was signed. The lease is for four years and requires payments of \(\$ 55,000\) per year on each 2 January, and can be renewed at the lessee's option for subsequent one-year terms up to three times, at a cost of \(\$ 23,000\) per year. At the end of any lease term, the equipment reverts back to the lessor if Belangier does not exercise its renewal option. Annual maintenance and insurance costs are paid by the lessor, and are estimated to be \(\$ 5,000\) per year for the first four years, and \(\$ 3,000\) per year thereafter. These costs are included in the lease payments. Belangier estimates that the equipment has an economic life of 8 to 10 years before it becomes obsolete.

TRUCK:

The truck has a list price of \(\$ 135,000\) but could be purchased by cash for \(10 \%\) less. The truck lease runs for four years and has a quarterly lease payment of \(\$ 5,000\), due at the beginning of each quarter. The lease commences on 1 January. If the truck is used for more than 50,000 kilometres in any 12 -month period, a payment of \(\$ 0.25\) per extra kilometre must be paid in addition to the annual rental. Belangier is responsible for all operating and maintenance costs.

At the end of the four-year lease agreement, Belangier may, at its option, renew the lease for an additional period; term and payments to be negotiated at that time.

Belangier has an \(8 \%\) incremental borrowing rate. The company uses straight-line depreciation for all of its tangible capital assets, using the half-year convention (i.e., a half-year depreciation in the first and last years). The truck has an estimated useful life of 10 years.

Required:

Classify each lease as a finance or operating lease. Justify your response.