Ford Signs a Non-Cancelable 8-Year Equipment Lease with Ray

Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-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?

A) Use 9.0% because it is the lessee's incremental borrowing rate.
B) Use 10.0% because it is the implicit lease rate of return to the lessor.
C) Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate.
D) Use 9.0% because it is the lesser of the implicit rate and Ford's incremental borrowing rate.