XYZ Corporation has a lease agreement for a building that it has been using for the past three years. The lease agreement is for ten years, with the total lease payments amounting to $1,200,000. The lease agreement contains a provision that allows the lessor to recover its initial investment in the building. The initial investment is estimated to be $500,000, and the lessor plans to recover this amount over the lease term. The lease agreement contains no other provisions for any guaranteed residual value or any transfer of ownership to XYZ Corporation at the end of the lease term.

a) Classify the lease as either an operating lease or a finance lease, and provide the rationale for your classification.

b) Assuming that the lease is classified as a finance lease, calculate the amount of the minimum lease payment, the interest expense, the amortization of the leased asset, and the lease liability for the first year.

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