Krause Company (lessee), on January 1, 2025, entered into an…
Krause Company (lessee), on January 1, 2025, entered into an eight-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value of $4,000,000 at the inception of the lease. Daly Corp. (lessor) calculated the annual rental payments to yield a 10% return and Krause is aware of that rate. Krause’s incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions: Annual rental payments of $665,716 are payable on the anniversary date of the lease (annuity due), with the first payment due at inception. A guarantee by Krause Company that Daly Corp. will realize $200,000 from selling the asset at the expiration of the lease. Krause estimates the residual value will be $125,000 at expiration. Required: What type of lease is this for Krause Company? Explain how you made the determination. What is the present value of the lease payments (a) for classification of the lease as either a finance or operating lease, and (b) for measurement of the lease liability? You may use Excel, a financial calculator, or the present value tables below to calculate the appropriate values. (Round to nearest dollar.) Prepare a lease amortization schedule for Krause Company covering the entire lease term. (Round to nearest dollar.) Prepare all journal entries for Krause Company to record the lease activity for 2025.