Lori-Ann Fashions, Inc. entered into a 5-year lease with Krishnan Rentals to use equipment. The economic life of the equipment is 30 years. The equipment had a fair value of $8,500,000. Lori-Ann has an option to purchase the equipment at the end of the lease term for $5,500,000, which is likely to be exercised. The annual lease payments are $983,199 and are due on January 1 of each year. The first payment is due on the lease commencement date of January 1, 2022. The implicit rate in the lease is known by Lori-Ann. There is no guaranteed residual value specified. The lessor did not offer any incentives to sign the lease. Lori-Ann did not incur any initial indirect costs. The company’s fiscal year ends on December 31. The carrying value of the equipment is $6,500,000.

Required

a. Compute the implicit rate.

b. Classify this lease for Krishnan Rentals.

c. Prepare the journal entry necessary for Krishnan Rentals to record this transaction on the lease commencement date.

d. Prepare the lease amortization schedule and prepare the journal entries through January 1, 2023, for Krishnan Rentals.