Oriole Co. processes jam and sells it to the public. Oriole leases equipment used in its production processes from Sage Hill, Inc. This year, Oriole leases a new piece of equipment from Sage Hill. The lease term is 5 years and requires equal rental payments of $12,000 at the beginning of each year. In addition, there is a renewal option to allow Oriole to keep the equipment one extra year for a payment at the end of the fifth year of $12,000 (which Oriole is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $63,953 and an estimated useful life of 7 years. Sage Hill set the annual rental to earn a rate of return of 5%, and this fact is known to Oriole. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature. a. How should Crane classify this lease?
b. Oriole should classify the lease as a/an lease.