Pearl Leasing Company agrees to lease equipment to Martinez Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2. The cost of the machinery is $510,000, and the fair value of the asset on January 1, 2020, is $717,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Martinez estimates that the expected residual value at the end of the lease term will be 60,000. Martinez amortizes all of its leased equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5. The collectibility of the lease payments is probable.
6. Pearl desires a 11% rate of return on its investments. Martinez’s incremental borrowing rate is 12%, and the lessor’s implicit rate is unknown.

Required:
a. Discuss the nature of this lease for both the lessee and the lessor.
b. Calculate the amount of the annual rental payment required.
c. Compute the value of the lease liability to the lessee.