An evaluation of the lease contract at its commencement date by Lessee results in the following:

• Initial direct costs paid by Lessee
• The lease term is 7 years, representing a major part of the economic life of this brand new asset
• It is probable that Lessor will collect the lease payments plus any amount necessary to satisfy the Lessees residual value guarantee
• The contract contains variable lease payments that depend on an index

How should Lessee classify this lease?

1. An operating lease

B A finance lease

4 Lessor is evaluating the same lease as described in #3 above. How should Lessor classify this lease?

A A sales-type lease

B A direct financing lease

C An operating lease