| On January 1, 20X6, Funny Bones Inc (FBI) entered into a lease agreement contract that entitled it to use equipment. Details of the contract follow: | |
| Lease payment, not including non-lease component | $7,000 |
| Non-lease component (maintenance agreement) | $500 |
| Implicit rate in the lease (readily determinable by lessee) | 7% |
| Incremental borrowing rate | 9% |
| Lease term | 3 years |
| Economic life of equipment | 6 years |
| Guaranteed residual value | $5,000 |
| Expected pay-out on residual value guarantee | $3,000 |
| Option to purchase | $1,000 |
| Fair value of equipment at end of lease term | $8,000 |
| First annual payment due | Jan 1, 20X6 |
| FBI accounts for the lease and non-lease components in the contract as separate lease components. What is the amount that FBI will record for interest expense for its year-ended December 31, 20X6? | |
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