Glaus Leasing AGagrees to lease equipment to Jensen Furniture on January 1, 2022. The following information relates to thelease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economiclife of 9 years. 2. The cost of the machinery is €525,000, and the fair value of the asset on January 1, 2022, is €700,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of€50,000. Jensen estimates that the expected residual value at the end of the lease term will be €50,000.Jensen depreciates all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2022. 5. The collectibility of the lease payments is probable.6. Glaus desires a 5% rate of return on its investments. Jensen’s incremental borrowing rate is 6%, and the lessor’s implicit rate is unknown. 

a. Prepare the journal entries Glaus would make in 2022 and 2023 related to the lease arrangement. 

b. Suppose Jensen expects the residual value at the end of the lease term to be €40,000 but still guarantees a residual of €50,000. Compute the value of the lease liability at lease commencement.