Question

PharoahInc. leased a new crane to Flounder Construction under a 5-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments of $48,500 each January 1, starting January 1, 2020. The crane has an estimated life of 7 years, a fair value of $240,000, and a cost to Pharoah of $240,000. The estimated fair value of the crane is expected to be $35,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Both Pharoah and Flounder adjust and close books annually at December 31. Collectibility of the lease payments is probable. Flounder’s incremental borrowing rate is 7%, and Pharoah’s implicit interest rate of 7% is known to Flounder.

Prepare all the entries related to the lease contract and leased asset for the year 2020 for the lessee and lessor, assuming Flounder uses straight- line amortization for all similar leased assets, and Pharoah depreciates the asset on a straight-line basis with a salvage value of $13,000. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25125 and the final answer to 0 decimal places e.g. 58,972.) Date Account Titles and Explanation Debit Credit Lessee's Entries 1/1/20 (To record lease.) 1/1/20 (To record lease payment.) 12/31/20 (To record interest and amortization expense.) Lessor's Entries 1/1/20 (To record the receipt of payment.) 12/31/20 (To record depreciation.) 12/31/20 (To record lease revenue.)

Answer 1

a.)	Lessee Entries:-
	Date	Particulars	Debit	Credit
	01-01-2020	Right of use asset	212,780
		Lease Liability		212,780
	01-01-2020	Lease Liability	48,500
		Cash		48,500
	31-12-2020	Amotization Expense	42,556
		Right of use asset		42,556
		(212,780 / 5 )
	31-12-2020	Interest Expense	11,500
		Interest Payable		11,500
		( 212,780 - 48,500 ) x 7%
	Working
	Calculation of Present value of lease payment
	Date	Annual Lease	PV Factor @7%	Present Value
	01-01-2020	48,500	1	48,500
	01-01-2021	48,500	0.93458	45,327
	01-01-2022	48,500	0.87344	42,362
	01-01-2023	48,500	0.81630	39,591
	01-01-2024	48,500	0.76290	37,001
	Total	242,500		212,780
b.)	Lessor Entries
	Date	Particulars	Debit	Credit
	01-01-2020	Cash	48,500
		Unearned Lease revenue		48,500
	31-12-2020	Depreciation Expense	32,429
		Crane		32,429
		( 240,000 - 13,000 ) / 7
	31-12-2020	Unearned Lease revenue	48,500
		Lease revenue		48,500
	Working
	Calculation of Present value of lease payment plus UGRV
	Date	Annual Lease Plus UGRV	PV Factor @7%	Present Value
	01-01-2020	48,500	1	48,500
	01-01-2021	48,500	0.93458	45,327
	01-01-2022	48,500	0.87344	42,362
	01-01-2023	48,500	0.81630	39,591
	01-01-2024	48,500	0.76290	37,001
	31-12-2024	35,000	0.72199	25,270
	Total	277,500		238,050