Xavier Corp. leases equipment with a useful life of ten years to Zero Inc. The operating lease requires annual payments of $1,500 over a three-year period without a renewal option. After two years, the two companies agree to extend a lease term by two years and increase annual payments to $1,750. What should happen because of this lease modification?

 Multiple Choice

1. Both companies should treat the original lease as being terminated and account for the modification as a new lease. 

2. The lease should be reclassified from an operating lease to a finance/sales-type lease. 

3. What has been recorded by both companies must be adjusted to conform to the new terms of the contract. 

4. All the answer choices are correct.

Answer rating: 100% (QA)

Correct Option 3What has been recorded by both companies must be adjusted to co... View the full answer