Reference no: EM132803287
Question - Accounting lease by lessee
Krause (the lessee) Company on January 1, 2020, enters into a 10-year noncancelable lease to lease an equipment from Top Leasing Co. (the lessor). The lease contains the following provisions:
1. The agreement requires equal annual rental payments of $275,980.5 at the beginning of each year (annuity-due basis).
2. The fair value of the equipment on Jan 1, 2020, is $2,000,000.
3. The equipment has an estimated economic life of 10 years, with no guaranteed residual value. Krause uses the straight-line method to depreciate its assets.
4. The lease is nonrenewable. At the termination of the lease, the equipment is returned to Top Leasing Co. but this equipment has no alternative use to the lessor.
5. The lessor's implicit interest rate is 8% and known by Krause.
Instructions -
(a) Is this a finance lease or operating lease to Krause? Explain why?
(b) Prepare the journal entries for Krause on Jan 1, 2020 to record signing of the lease agreement and first rental payment. Show computation of the amounts of the entry.
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