Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Rays incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipments production, Ray warrants equipment for eight full years anyway.

On Fords books, this lease is treated as a/an:

Multiple Choice

• a. operating lease.

• b. short-term lease.

• c. finance lease.

• d. sales-type capital lease.