Assume that on January 1, 2014, Yard Waste Corp. signs a 5-year noncancelable lease agreement to lease an industrial-strength mulching machine. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $96,680 beginning on December 31, 2014.
2. The fair value of the machine on January 1, 2014, is $400,000.
3. The machine has an estimated economic life of 10 years, with an unguaranteed residual value of $35,000. The lease contains a bargain purchase price of $2,000.Yard Waste depreciates similar machines on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the machine reverts to the lessor.
5. Yard Waste's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Yard Waste.
6. The yearly rental payment includes $1,563.19 of executory costs related to insurance on the machine.