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Krause Company on January $1,2025,$ enters into a nine$-$year noncancelable lease for

equipment having an estimated useful life of $10$ years and a fair value to the lessor, Daty

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:

Rental payments of $$266,000$ are payable at the beginning of each six$-$month period.

A bargain renewal option allowing the lessor to extend the lease one year beyond the

lease term.

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:

What should be considered the lease term?

What kind of lease is this to Krause Company? Explain how you made the determination.

What is the present value of the lease payments $(1)$ for classification of the lease and $(2)$

for measurement of the lease liability for Krause? You may use Excel, a financial

calculator, or the present value tables below to calculate the appropriate values.

What journal entries would Krause record during the first year of the lease? $($Include an

amortization schedule through at least $\frac{1}{1}\frac{?}{26}$ and round to the nearest dollar.

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