Problem
On January 1, 20X6, Funny Bones Inc (FBI) entered into a lease agreement contract that entitled it to use the equipment. Details of the contract follow: Lease payment, not including non-lease component $7,000 Non-lease component (maintenance agreement) $500 Implicit rate in the lease (readily determinable by lessee) 7% Incremental borrowing rate 9% Lease term 3 years Economic life of equipment 6 years Guaranteed residual value $5,000 Expected pay-out on residual value guarantee $3,000 Option to purchase $1,000 Fair value of equipment at end of lease term $8,000 First annual payment due Jan 1, 20X6 FBI accounts for the lease and non-lease components in the contract as separate lease components. What is the amount that the FBI will record for interest expense for its year-ended December 31, 20X6?