Theo Corporation, a lessor of office machines, purchased a new machine for $$650,000$ on December $31,$

year $2,$ which was delivered the same day $($by prior arrangement$)$ to Ortiz Company, the lessee. The following

information relating to the lease transaction is available:

The leased asset has an estimated useful life of nine years which coincides with the l$$ase term.

At the end of the lease term, the machine will revert to Theo, at which time it is expected to have a residual

value of $$70,000($none of which is guaranteed by Ortiz$).$

Theo's implicit interest rate is $8\%,$ which is known by Ortiz.

Ortiz's incremental borrowing rate is $10\%$ at December $31,$ year $2.$

Lease rentals consist of nine equal annual payments, the first of which was paid on December $31,$ year $2.$

The lease is appropriately accounted for as a direct financing lease by Theo and as a capital lease by Oriz.

Both lessor and lessee are calendar year corporations and depreciate all fixed assets on the straight$-$line

basis.

Information of present value factors is as follows:

Present value of $$1$ for nine periods at $8\%$

Present value of $$1$ for nine periods at $10\%$

Present value of an annuity of $$1$ in advance for nine periods at $8\%$

$0\mathrm{.}500249$

$0\mathrm{.}424098$

$6\mathrm{.}746639$