On January 1, 2017, Waterway Corp. signs a 5-year noncancelable lease agreement to lease a backhoe from Scherzer Equipment, Inc. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $3,420 beginning on January 1, 2017. 2. The fair value of the backhoe on January 1, 2017, is $12,400. 3. The backhoe has an estimated economic life of 6 years, with an unguaranteed residual value of $1,570. Waterway depreciates similar equipment on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the backhoe reverts to the lessor. 5. Waterways incremental borrowing rate is 11% per year. The lessors implicit rate is not known by Waterway. 6. The yearly rental payment includes $460 of executory costs related to insurance on the back hoe.