Wright Company leases an asset for five years on December 31, 2000. Annual lease cost of $10,000 is payable on each December 31 beginning with the year 2001. In addition to the annual lease cost, the lease contract calls for a guaranteed residual value of $3,000.
The asset has an economic life of seven years. Wright’s incremental borrowing rate is 8 percent. The asset has an acquisition cost of $45,000. There are no purchase options.

Required:
a. As things now stand, is this a capital lease or an operating lease? Show figures.
b. What can Wright do to convert this lease to an operating lease? Explain and show figures.