Oriole Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement:
 

1.		The term of the noncancelable lease is 4 years, with no renewal option. Payments of $869,129 are due on July 1 of each year.
2.		The fair value of the equipment on July 1, 2021 is $3,150,000. The equipment has an economic life of 6 years with no salvage value.
3.		Oriole depreciates similar machinery it owns on the sum-of-the-years'-digits basis.
4.		The lessee pays all executory costs.
5.		Oriole's incremental borrowing rate is 9% per year. The lessee is aware that the lessor used an implicit rate of 7% in computing the lease payments.

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(a)

Indicate the type of lease Oriole Company has entered into and what accounting treatment is applicable.
 

 Operating Lease MethodCapital Lease Method

 

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