The following facts pertain to a non-cancelable lease agreement between Faldo Leasing Company and Sandhill Company, a lessee. Commencement date January 1, Annual lease payment due at the beginning of each year, beginning with January 1, $126,840 Residual value of equipment at end of lease term, guaranteed by the lessee $55,000 Expected residual value of equipment at end of lease term $50,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, $653,000 Lessors implicit rate 9 % Lessees 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.

Suppose Sandhill received a lease incentive of $5,000 from Faldo Leasing to enter the lease. How would the initial measurement of the lease liability and right-of-use asset be affected?