10 Spacing 1) Krause Company on January 1, 2018, enters into a nine-year non-cancelable 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 for property taxes, 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 (a) What kind of lease is this to Krause Company? (Show reasons / workings)