BB Ltd manufactures specialised machinery for both sale and lease. On 1 July 2014, BB leased a specialised machine to CC Ltd (CC), incurring $200 in costs to write and execute the lease document. CC incurred $500 in costs to negotiate the agreement. The penalty for cancellation of the lease is 50% of the total lease payment. The leased machine costed AA $51,000 to manufacture. The machine is expected to have an economic life of 5 years, after which time it will have a residual value of $6,000. The lease agreement details are as follows.

Length of lease 4 years Commencement date 1 July 2014 Annual payments, payable 1st July commencing 1st July 2014 $22,000 Residual value at the end of lease term, 70% guaranteed by CC $6,000 Implicit interest rate in the lease 8%