VidEqp Company, Inc., [VEI] manufactures equipment for use by studios producing movies. On January 1, 2019, it leased a crane mounted camera set to the Krown Studios, Inc., [KSI] on a 10-year contract. The equipment has a 12-year life, sells at $675,000 and costs $474,000 to manufacture. It will revert back to VEI at the end of the lease and its expected residual value is expected to be $165,000. The lessee is required to make ten annual instalment payments with the first one at the start of the lease.

VEI has set an interest rate of 6% which remains undisclosed to KSI. The lessee therefore uses an incremental rate of 7% to record the leased asset. Both companies follow IFRS, have December 31 year end, amortize using straight line.

How should VEI classify the lease transaction?

Select one:

a. Classify as an operating lease

b. Classify as a capital, manufacturer/dealer sales type lease

c. Classify as a capital, finance type lease

d. Classify as a direct sales capital lease

e. none of the above