Sandhill Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no
renewal option. Payments of $498572 are due on January 1 of each
(b) The fair value of the machine on January 1, 2021, is $1400000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Sandhill depreciates all machinery it owns on a straight-line basis.
(d) Sandhill’s incremental borrowing rate is 9% per year. Sandhill does not have knowledge of the 7% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Sandhill Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
If the present value of the future lease payments is $1400000 at January 1, 2021, what is the amount of the reduction in the lease liability for Sandhill Corp. in the second full year of the lease if Sandhill Corp. accounts for the lease as a finance lease? (Rounded to the nearest dollar.)
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