Lessor Inc. leased equipment with a fair value of $45,000 and a carrying value of $37,000, under the following terms:

Lease Terms

Ownership of equipment transfers to lessee at lease-end No

Lease includes a purchase option No

Length of lease term in years 6

Economic life of the equipment in years 10

Alternative use of the equipment at lease-end Yes

Annual lease payment, first payment due at the end of the year $8,750

Guaranteed residual value by an insurance company $9,000

Lessor Inc.s implicit interest rate 8.7412%

How would Lessor Inc. classify the lease? Assume that the company considers 90% of fair value to be substantially all of fair value.

Select one: a. Direct financing lease b. Finance lease c. Operating lease d. Sales-type lease