On January 1, 2021, Fargo Corp. enters into a ten-year non-cancellable lease with Wells Ltd. for

equipment having an estimated useful life of 11 years and a fair value of $6,000,000. Fargo's

incremental borrowing rate is 8%, but they do not know Wells implicit rate. Fargo uses the

straight-line method to depreciate assets. The lease contains the following provisions:

1.

Semi-annual lease payments of $442,000 (including $42,000 for property taxes), payable

on January 1 and July 1 of each year.

2.

A guarantee by Fargo Corp. that Wells Ltd. will realize $200,000 from selling the asset at

the expiration of the lease (residual value).

Both companies adhere to ASPE.

Instructions

a.

Calculate the undiscounted minimum lease payments over the life of the lease.

b.

Calculate the present value of the minimum lease payments.

c.

What kind of lease is this to Fargo Corp.? Why?

d.

Present the journal entries that Fargo would record during the first year of the lease. Include

an amortization schedule through January 1, 2022 and round values to the nearest dollar.