Morand Corporation will lease machinery from LePage Manufacturing Ltd. on August 1, 2022. Morand reports under ASPE and the company has a December 31 year end. The following information relates to the lease agreement:

The leases term is six years with no renewal option and the machinery has an estimated economic life of nine years.

The machinerys fair value on August 1, 2022 is $560,000. Its cost to LePage is $420,000.

At the end of the lease term, the asset reverts to LePage, the lessor. At this time, the asset is expected to have a residual value of $80,000 and this value is guaranteed by Morand. Morand depreciates all of its equipment on a straight-line basis.

The lease agreement requires equal annual rental payments, beginning on August 1, 2022. LePage uses a 8% interest rate in setting the lease payments and Morand is aware of this rate. Equivalent financing for the machinery could have been obtained from Morands bank at 8.5%.

LePage charges $6,000 in executory costs over and above the amount of the annual lease payments to recover maintenance costs.

At the end of the lease, the machinery has a fair value of $50,000 and is returned to LePage.