Ray$$s incremental borrowing rate is $8\mathrm{.}5\%.$ Ford has a $9\%$ incremental borrowing rate. Ray believes that the equipment has a ten$-$year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year.Since this is the first year of the equipment$$s production, Ray warrants equipment for eight full years anyway.

Ford uses which one of the following interest rates to record this lease?

Multiple Choice

Use $10\mathrm{.}0\%$ because it is the implicit lease rate of return to the lessor.

Use $9\mathrm{.}0\%$ because it is the lesser of the implicit rate and Ford$$s incremental borrowing rate.

Use $8\mathrm{.}5\%$ because it is the lesser of the implicit rate and Ray$$s incremental borrowing rate.

Use $9\mathrm{.}0\%$ because it is the lessee$$s incremental borrowing rate.