2. BE21-1 Callaway Golf Co lesses telecommunication equipment. Assume the following data for equip-
mentleased from Photon Company The lease term is 5 years and requires equal rental payments of 31,000
at the beginning of each year. The equipment has a fair value at the inception of the lease of 138,000 an
estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third
parties. Photon set the annual rental to earn a rate of return of 10% and this fact is known to Callaway. The
lease does not transfer title or contain a bargain-purchase option. How should Callaway classify this
lease?