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   
0 0
Add a commentTranscribed image text
Next >

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

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Oriole Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain...
Oriole Company leases a building to Walsh, 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 $3,508 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 $16,400, a book value to...
January 1, 2018, Pharoah, Inc. signs a 10-year noncancelable lease agreement to lease a storage building...
January 1, 2018, Pharoah, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.(a) The agreement requires equal rental payments at the beginning each year.(b) The fair value of the building on January 1, 2018 is $6,200,000; however, the book value to Holt...
On January 1, 2021, Pharoah, Inc. signs a 10-year noncancelable lease agreement to lease a storage...
On January 1, 2021, Pharoah, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $5600000; however, the book...
Tendai Inc. sells computer systems. Tendai leases computers to John company on January 1, 2020. the...
Tendai Inc. sells computer systems. Tendai leases computers to John company on January 1, 2020. the manufacturing cost of the computers was $12 million. This non-concealable lease had the following terms: * Lease payments : $2,125,000 semiannually , first payment at January 1,2020, remaining payments at June 30 and December 31 each year through jump 30,2022. * Lease term : 3 years (6 semi-annual payments) * No residual value; no bargain purchase option * Economic life of equipment : 5...
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company,...
The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of    each year, beginning with May 1, 2014 $20,471.94 Bargain-purchase option price at end of lease term $4000.00 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000.00 Fair value of asset at May 1, 2017 $91,000.00 Lessor’s implicit rate 8 % Lessee’s incremental borrowing rate...
The following facts pertain to a noncancelable lease agreement between Bonita Leasing Company and Windsor Company,...
The following facts pertain to a noncancelable lease agreement between Bonita Leasing Company and Windsor Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of    each year, beginning with May 1, 2017 $19,373.99 Bargain-purchase option price at end of lease term $4,400 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $62,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 9 % Lessee’s incremental borrowing rate...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $13,046 to be made at the beginning of each year. 2. The machinery’ has a fair value of $68,934, a book value of $51,440, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Martinez Corporation leased equipment to Tamarisk, Inc. on January 1, 2020. The lease agreement called for...
Martinez Corporation leased equipment to Tamarisk, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,283 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $8,500, a book value of $6,500, and Martinez expects a residual value of $6,000 at the end of the lease term. Martinez set the lease payments with the intent of earning a 7% return, though...
The following facts are for a non-cancellable lease agreement between Blossom Corporation and Russell Corporation, a...
The following facts are for a non-cancellable lease agreement between Blossom Corporation and Russell Corporation, a lessee: Inception date July 1, 2020 Annual lease payment due at the beginning of each year, starting July 1, 2020 $ 20,194.64 Bargain purchase option price at end of lease term reasonably certain to be exercised by Russell $ 3,700.00 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $ 48,800.00 Fair value of asset at July 1, 2020 $...
Montana Inc. sells computer systems. Montana leases computers to Utah Company on June 30 , 20...
Montana Inc. sells computer systems. Montana leases computers to Utah Company on June 30 , 20 1 7 . The computers cost Montana $ 12 million to manufacture . Th e lease is non - cancelable and ha s the following terms: • Lease payments: $2,466,754 semiannually; first payment due J une 30 , 20 1 7 ; remaining payments due December 3 1 and J une 30 each year through December 31 , 20 2 1. • Lease term:...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT