In January year 1, Hopper Corp. signed a capital lease for
equipment with a term of twenty years. In year 3, Hopper negotiated
a modification to a capital lease that resulted in the lease
being reclassified as an operating lease. Hopper calculated the
company had a gain of $8,000 on the lease modification. Hopper
retains all rights to use the property during the remainder of the
lease term. How should Hopper account for the lease modification?

Recognize an $8,000 gain from lease modification during
year 3.
Defer the gain and recognize it over the life of the operating
lease.
Recognize the $8,000 gain as an extraordinary item in
year 3. Recognize the $8,000 gain as a discontinued operation
in year 3.