The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Carla Company, a lessee. Commencement date January 1, Annual lease payment due at the beginning of each year, beginning with January 1, $108,305 Residual value of equipment at end of lease term, guaranteed by the lessee $46,000 Expected residual value of equipment at end of lease term $41,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, $557,000 Lessor's implicit rate 9 % Lessee's incremental borrowing rate 9 % The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line amortization for all leased equipment.