Reference no: EM132716539

Krause Company on January 1, 2021, enters into a nine-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of $4,000,000. Krause's incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets.

The lease contains the following provisions:

1. Rental payments of $266,000 are payable at the beginning of each six-month period.

2. An option allowing the lessor to extend the lease one year beyond the lease term.

3. A guarantee by Krause Company that Daly Corp. will realize $200,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $120,000.

Instructions

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

Problem (b) What should be considered the lease term?

Problem (c) What is the present value of the lease payments (1) for classification of the lease and (2) for measurement of the lease liability? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 semi-annual interest periods at 8% annual rate, .45639.) (Round to nearest dollar.)

Problem (d) What journal entries would Krause record during the first year of the lease? (Include an amortization schedule through 1/1/22 and round to the nearest dollar.)