On January $1,2023,$ Shrek Inc. enters into a seven$-$year non$-$cancellable lease

with Fiona Ltd$.$ for machinery having an estimated useful life of nine years and a

fair value of $$4,300,000.$ Shrek's incremental borrowing rate is $8\%$ and Fiona's

implicit rate is $6\%.$ Shrek uses the straight$-$line depreciation method to depreciate

assets. Shrek will make annual lease payments on January $1$ of each year. The

lease includes a guarantee by Shrek Inc. that Fiona Ltd$.$ will realize $$100,000$

from selling the asset at the expiration of the lease, which Shrek expects to pay.

Both companies adhere to IFRS.

Instructions

a$)$ Calculate the lease payment Fiona Ltd$.$ will charge Shrek $($assuming no

mark$-$up of the machinery from fair value$).$ Round to the nearest dollar.

b$)$ Calculate the present value of the lease payments. Round to the nearest

dollar.

c$)$ What kind of lease is this to Shrek Inc.? Why?

d$)$ Present the journal entries that Shrek Inc. would record during the first year

of the lease. Round to the nearest dollar.