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

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