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Swifty Leasing Company agrees to lease equipment to Nash Corporation on January 1, 2017. The following information relates to the lease agreement.
1.The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2017, is $737,000.
3.At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $110,000. Nash estimates that the expected residual value at the end of the lease term will be 110,000. Nash amortizes all of its leased equipment on a straight-line basis.
4.The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
5.The collectibility of the lease payments is probable.
6.Swifty desires a 10% rate of return on its investments. Nash's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.
Compute the value of the lease liability at lease commencement.
