On December 31, 2016, Escapee Company leased machinery from Terminator Corporation for an agreed-upon lease term of 3 years. Escapee agreed to make annual lease payments of $17,000, beginning on December 31, 2016. The expected residual value of the machinery at the end of the lease term is $9,000, though Escapee does not guarantee any residual value to Terminator.

1. What amount will Escapee record as its lease liability on December 31, 2016, if its incremental borrowing rate is 6% and the implicit rate of the lease is unknown?

B. What would the lease liability be if Escapee guaranteed the residual value at $9,000 when the residual value is expected to be $5,000 at the end of the lease?