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What kind of lease is this to the two companies and why

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Question - On January 1, 2020, Dulcinea Company enters into a ten-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea uses the straight-line method to depreciate its assets. The lease contains the following provisions:

1. Rental payments of $687,268, payable at the beginning of each year.

2. There is a guaranteed residual value of $300,000. The expected residual value is $250,000.

Required -

a. What kind of lease is this to the two companies and why?

b. Prepare the journal entries for both companies during the first year of the lease.

Reference no: EM133163941

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