Question

PLEASE HELP ASAP

Krause Company on January 1, 2016, enters into a 10-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%. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions:

1.		Rental payments of $584,000 including $52,000 for executory costs, payable at the beginning of each year.
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. (a) What is the present value of the lease payments? (b) Is this a capital lease to Krause? Why? (c)Create a lease amortization table for the Krause (d) What journal entries would Krause record on January 1, 2018; December 31, 2018; and Jan. 1 2019?

Answer 1

" a. Present value of lease Payments Formula P V = SUM[P/(l + r)^n] + (RV/(l + r)^n] Where P V = Present Value P = Annual Lease Payments excluding Executory Cost*** *** Executory costs are not included in the minimum lease payments. The executory costs include expenses such as maintenance, insurance, contingent rent, and taxes incurred for the leased property by the lessor, r = Interest rate n = number of years in the lease term RV = residual value SUM(P/(l + r)^n) = the total amount paid over the lease term, discounted for the interest rate. In the above problem. P = $532,000 ($5,84,000 Less Executory Cost $52,000) r = 0.08, n = 10, RV = $200,000 (Guarantee Value which Krause has agreed to pay the Lessor) P V = [532,000] + (532,000/(1.08)] + [532,000/(1.08)^2] + [532,000/(1.08)^3] + [532,000/(1.08)^4] + [532,000/(1.08)^5]+ [532.000/(1.08)^6]+[532.000/(1.08)^7]+[532.000/(1.08)^8]+[532.000/(1.08)^9] + [200.000/(1.08)^10] = $3,947,983 this is a ""Financial lease "". the 3 reasons are below Daly Corp. agrees to transfers ownership of the asset "