Pearl Leasing Company agrees to lease equipment to Martinez 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 $495,000, and the fair value of the asset on January 1, 2020, is $704,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Martinez estimates that the expected residual value at the end of the lease term will be 45,000. Martinez 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. Pearl desires a 9% rate of return on its investments. Martinezs incremental borrowing rate is 10%, and the lessors implicit rate is unknown.

(Assume the accounting period ends on December 31.)

a) 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 place e.g. 58,972)

b) 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 place e.g. 58,972)

c) Prepare the journal entries Martinez would make in 2020 and 2021 relate to the lease arrangement ( To record the lease, To record lease payment, To record amortization, To record interest)

d) Prepare the journal entries pearl would make in 2020 and 2021 related to the lease arrangement ( To record the lease, To record lease payment.)

f) Suppose Martinez expects the residual value at the end of the lease term to be $35,000 but still guarantees a residual of $45,000. Compute the value of the lease liability at lease commencement.