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Question 3 25 pts Krause Company on January 1, 2022, enters into a ten-year noncancelable lease for equipment having an estimated useful life of 10
Question 3 25 pts Krause Company on January 1, 2022, enters into a ten-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%. Implicit rate Daly Corp., used is 10% and Krause does not know that. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of 266,000, payable at the beginning of each six-month period. 2. 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? (b) What is the present value of the lease payments (1) for classification of the lease and (2) for measurement of the lease liability? (Round to nearest dollar.) 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; PV factor for annuity due of 20 semi-annual payments at 10% annual rate, 13.08532; PV factor for amount due in 20 semi-annual interest periods at 10% annual rate, .37689; (c) What journal entries would Krause record during the first year of the lease? (Include an amortization schedule through 1/1/23 and round to the nearest dollar.)
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