Waterway Dairy leases its milking equipment from Wildhorse Finance Company under the following lease terms. 1. 2. 3. The lease term is 10 years, noncancelable, and requires equal rental payments of $28,200 due at the beginning of each year starting January 1, 2020. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $213,070 and a cost of $247,000 on Wildhorse Finance's books. It also has an estimated economic life of 15 years and an expected residual value of $15,100, though Waterway Dairy has guaranteed a residual value of $18,800 to Wildhorse Finance. The lease contains no renewal options, and the equipment reverts to Wildhorse Finance upon termination of the lease. The equipment is not of a specialized use. 4. 5. 6. Collectibility of the payments is probable. Waterway Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8%. Waterway Dairy depreciates similar equipment that it owns on a straight-line basis.