Monty Leasing Company agrees to lease equipment to Flounder 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 $475,000, and the fair value of the asset on January 1, 2020, is $681,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Flounder estimates that the expected residual value at the end of the lease term will be 50,000. Flounder amortizes all of its leased equipment on a straight-line basis. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 4. 5. The collectibility of the lease payments is probable. 6. Monty desires a 9% rate of return on its investments. Flounder's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown. (Assume the accounting period ends on December 31.)