Reference no: EM132712599

Question - Congo Company on January 1, 2019, enters a five-year noncancelable lease, with four renewal options of one year each, for equipment having an estimated useful life of 10 years and a fair value to the lessor, Cuscus Corp., at the inception of the lease of $2,000,000. Congo's incremental borrowing rate is 8%. Congo uses the straight-line method to depreciate its assets. The lease contains the following provisions:

1. Rental payments of $159,000 including $13,000 for property taxes, payable at the beginning of each six-month period.

2. A termination penalty assuring renewal of the lease for a period of four years after expiration of the initial lease term.

3. An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee.

4. A guarantee by Congo Company that Cuscus Corp. will realize $100,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $60,000.

Instructions -

(a) What kind of lease is this to Congo Company?

(b) What should be considered the lease term?

(c) What are the minimum lease payments?

(d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest periods at 8% annual rate, .45639.) (Round to nearest dollar.)

(e) What journal entries would Krause record during the first year of the lease? (Include an amortization schedule through 1/1/16 and round to the nearest dollar.)