Swifty Leasing Company agrees to lease equipment to Nash Corporation on January 1, 2017. 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 $520,000, and the fair value of the asset on January 1, 2017, is $737,000.

3.At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $110,000. Nash estimates that the expected residual value at the end of the lease term will be 110,000. Nash amortizes all of its leased equipment on a straight-line basis.

4.The lease agreement requires equal annual rental payments, beginning on January 1, 2017.

5.The collectibility of the lease payments is probable.

6.Swifty desires a 10% rate of return on its investments. Nash's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Suppose Nash expects the residual value at the end of the lease term to be $100,000 but still guarantees a residual of $110,000. Compute the value of the lease liability at lease commencement.