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 Lessee’s residual value guarantee

? The contract contains variable lease payments that depend on an index

I.How should Lessee classify this lease?

A. An operating lease

B A finance lease

II. Lessor is evaluating the same lease as described above. How should Lessor classify this lease?

A A sales-type lease

B A direct financing lease

C An operating lease