On January 1, 2020, Fargo Corp. enters into a ten-year non-cancellable lease with Wells Ltd. for equipment having an est

[answerhappygod]

On January 1, 2020, Fargo Corp. enters into a ten-year
non-cancellable lease with Wells Ltd. for equipment having an
estimated useful life of 11 years and a fair value of $ 6,000,000.
Fargo's incremental borrowing rate is 8%, but they do not know
Wells’ implicit rate. Fargo uses the straight-line method to
depreciate assets. The lease contains the following provisions:
1. Semi-annual
lease payments of $ 438,000 (including $ 38,000 for property
taxes), payable on January 1 and July 1 of each year.
2. A guarantee
by Fargo Corp. that Wells Ltd. 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.
Both companies adhere to ASPE.
Instructions
a) Calculate
the undiscounted minimum lease payments over the life of the
lease.
b) Calculate
the present value of the minimum lease payments. Round to nearest
dollar.
c) What kind of
lease is this to Fargo Corp.? Why?
d) Present the
journal entries that Fargo would record during the first year of
the lease. Include an amortization schedule through January 1, 2021
and round values to the nearest dollar.