On December 31. 2021. Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and has an expected useful life of six years. Its normal sales, price is $365,760. The lessee-guaranteed residual value at December 31, 2025, is $25,000. Equal payments under the lease are $ 100,000 and are due on December 31 of each year. The first payment was made on December 31, 2021. Western Soya's incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation or amortization.

Required: How should this lease be classified (a) by Western Soya Co. (the lessee) and (b)by Rhone-Metro Industries (the lessor)? Why?

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