In: Accounting
Krause Company on January 1, 2020, enters into a five-year
noncancelable lease for equipment having an...
Krause Company on January 1, 2020, enters into a five-year
noncancelable lease for equipment having an estimated useful life
of 6 years and a fair value to the lessor, Daly Corp., at the
inception of the lease of $4,000,000. The cost to manufacture the
equipment was $3,000,000. Daly’s required rate of return is 8%.
Krause’s incremental borrowing rate is 10% and is aware of Daly’s
required rate of return. Krause uses the straight-line method to
amortize its assets. Daly is reasonably confident that Krause will
make the lease payments and has no material cost uncertainties.
The lease contains the following provisions:
- Rental payments of $896,050 are payable at the beginning of
each year.
- 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.
Round your numbers to the nearest whole numbers.
|
PV of $1 |
PV of Annuity Due |
period of 5, interest rate 8% |
0.68058 |
4.31213 |
period of 5, interest rate of 10% |
0.62092 |
4.16986 |
Required:
- According to the FASB, how should the lease be classified by
both Krause (lessee) and Daly (lessor)? Why?
- Calculate the present value of lease liability and lease
receivable on lease signing date.
- Prepare lease amortization schedules up to 1/1/2021 for both
Krause and Daly
- Prepare the journal entries to record the inception of the
lease and the first lease payment on January 1, 2020 for
both Krause and Daly.
- Prepare all appropriate adjusting journal entries for
both Krause and Daly at December 31, 2020.