Interstate automobiles corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on janurary 1, 2018. Information concerning the lease and the vans follows:

A) Equal annual lease payments of $300,000 are due on January 1, 2018, and there after on December 31 each year. The first payment was made on January 1, 2018. Interstate's implicit interest rate is 10% and known by VIP.

B) Vip has the option to purchase all of the vans at the end of the lease for a total of $290,000. The Van's estimated residual value is $300,000 at the end of the lease term and $50,000 at the end of 7 years, the estimated life of each van.

C) Vip estimates the fair value of the vans to be $1,240,000. Interstate's cost was $1,050,000.

D) Vip's incremental borrowing rate is 9%.

E) VIP will pay the executory costs (maintenance, insurance, and other fees not included in the annual lease payments) of $1,000 per year. The depreciation method is straight line.

Required:

Analyze the above transaction by explaining the concepts and criteria that dictate the classification of a finance lease. Write a memo to the CFO of Interstate Automobiles explaining these accounting concepts, and then apply those concepts in detail to the above transaction.