Concord Leasing Company agrees to lease equipment to Marigold Corporation on January 1, 2020. 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 $514,000, and the fair value of the asset on January 1, 2020, is $677,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Marigold estimates that the expected residual value at the end of the lease term will be 55,000. Marigold amortizes all of its leased equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.

5. The collectibility of the lease payments is probable.

6. Concord desires a 10% rate of return on its investments. Marigold's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

(Assume the accounting period ends on December 31.)

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(a)

Discuss the nature of this lease for both the lessee and the lessor.

This is a finance leasefor Marigold.

This is a sales-type leasefor Concord.

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(b)

Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Annual rental payment

$121,148

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(c)

Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Present value of minimum lease payments

$