Question

Pharoah Company leases a building to Shamrock, Inc. on January 1, 2020. The following facts pertain...

Pharoah Company leases a building to Shamrock, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1. The lease term is 5 years, with equal annual rental payments of $4,910 at the beginning of each year.
2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3. The building has a fair value of $23,500, a book value to Pharoah of $16,500, and a useful life of 6 years.
4. At the end of the lease term, Pharoah and Shamrock expect there to be an unguaranteed residual value of $4,125.
5. Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. Shamrock was unaware of the implicit rate used in the lease by Pharoah and has an incremental borrowing rate of 10%.



How would Pharoah (lessor) and Shamrock (lessee) classify this lease?

Pharoah would classify the lease as a                                                           finance or sales-type or operating lease.
Shamrock would classify the lease as a                                                           operating or finance or sales-type lease.


How would Pharoah initially measure the lease receivable, and how would Shamrock initially measure the lease liability and right-of-use asset?

Pharoah
Lease receivable $
Present value of lease pay $
Shamrock
Lease Liability/Right-of-Use Asset $
Business   Accounting   
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Homework Answers

Answer #1

ANSWER:

Pharoah would classify the lease as a Sales - type lease.

Shamrock would classify the lease as a  Finance lease.

Calculating Lease receivable for Pharoah

Particulars Amount
Annual Rent Payments 4,910
PVAD (5 years, 9%) 4.2397
Present value of Rental Payment (4,910 * 4.2397) (A) 20,817
Expected Residual value (Unguarantee) 4,125
PVF (5 years, 9%) 0.6499
Present Value of Residual Value (4,125 * 0.6499) (B) 2,680
Lease Receivable (A + B) 23,497

Calculating Present Value of lease pay for Pharoah

Particulars Amount
Annual Rent Payments 4,910
PVAD (5 years, 9%) 4.2397
Present value of Rental Payment (4,910 * 4.2397) 20,817

Lease Liability/Right - of - Use Asset = $20,817

The initial lease liability for Pharoah is $20,817

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