Bridgeport Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Indigo Medical Center for a period of 10 years. The normal selling price of the machine is $528,538, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $15,700. The hospital will pay rents of $64,000 at the beginning of each year. Bridgeport incurred costs of $275,000 in manufacturing the machine and $15,400 in legal fees directly related to the signing of the lease. Bridgeport has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Indigo Medical Center has an incremental borrowing rate of 5% and an expected residual value at the end of the lease of $10,000. Click here to view factor tables.

(a)

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Discuss the nature of this lease in relation to the lessee. The nature of this lease in relation to the lessee is operating leasesales-type leasefinance lease. Compute the amount of the initial lease liability. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Initial Lease Liability

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