If a lessee is building up equity in equipment being leased, what type of lease is it?

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When a lessee is building up equity in equipment being leased, this indicates that the lease agreement has characteristics similar to ownership of the asset, which is the defining feature of a capital lease. In a capital lease, the lessee recognizes the leased asset on their balance sheet as if it were owned, which allows for depreciation and interest expense deductions. This builds equity over time, reflecting the lessee's financial involvement with the asset.

In contrast, an operating lease does not transfer ownership and typically involves rental agreements where the asset does not appear on the lessee's balance sheet as an owned asset. Therefore, the lessee would not build equity in the equipment through this type of lease.

The terms "noncancelable lease" and "cancelatable monthly lease agreement" refer more to the flexibility of the lease contract rather than the financial implications associated with ownership of the leased asset. These options do not inherently indicate equity build-up in the equipment, which is the core focus of the question.

Thus, the correct answer is a capital lease because it specifically aligns with the concept of the lessee building equity in the leased equipment.

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