Question

Exercise 21A-10 a-d The following facts pertain to a non-cancelable lease agreement between Pharoah Leasing Company and Shamrock Company, a lessee. May 1, 2017 Commencement date Annual lease payment due at the beginning of each year, beginning with May 1, 2017 Bargain purchase option price at end of lease term Lease term Economic life of leased equipment $15,138.16 $4,000 5 years 10 years Lessor's cost Fair value of asset at May 1, 2017 Lessor's implicit rate Lessee's incremental borrowing rate $50,000 $68,000 8 % 8 % The collectibility of the lease payments by Pharoah is probable. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Discuss the nature of this lease to Shamrock. The nature of this lease to Shamrock is a finance lease.

Answer 1

Answer → Discuss the nature of this lease to Shamrock The nature of this lease to shamrock is a Finance lease Present value of minimum lease payments : Date Present value Factor @ 8% Present Value 5/1/17 15/1/18 lease payments $15138.16 $15138.16 $ 15138.16 $ 15138.16 $ 15138.16 10.92593 0.85734 0.79383 $15138.16 $14016.88 $12978.55 $12017.13 $11127.00 5/1/19 5/1/20 5/1/21 0.73503 0.68058 4/30/22 Total $ 4000 $ 64552.64 $2722.32 $68000.04 - It is a finance lease for Shamrock Clessee) because there is a bargain purchase option available at end of the lease. Also, present value of lease payments is equal to the fair value of the leased Asset.

→ Discuss the nature of this lease to pharoaho The nature of this lease to bharoah is a sales typelease. Because present value of minimum lease payments is higher than Carrying amount of the Equipment in the books of Pharoah Clessor) since, Present value of carrying amount of minimum lease payments Asset in lessog books. $ 68000 > $50000 Therefore, It is a sales type lease for pharoan (lessor). CI → Prepare a lease Amortization schedule for Shamrock for the 5 year lease termo SHAM ROCK Company Clessee) Lease Amortization Schedule Date Annual lease Payment plus BPO Intereston liability lease liability Reduction of lease liability $68000 5117 5/717 5/1/18 5//19 $0 $4228.95 $15138.16 $10909.21 $52841.84 $41952.63 $30110.68 5/1/20 5//21 $15138.16 $15138.16 | $15138.16 $ 15138.16 $ 15138.16 $ 4000 $79690.80 $3356.21 $11781.95 $ 2413.65 $12724.51 $17446.17 $ 1395.69 $13742.47 $ 3703.70 $296.30 | $3703.70 $0 4130/22 $11690.80 $68000

→ Prepare the Journal Entries on the lessee's books to reflect the signing of the lease agreement and to record the payment and Expenses related to this lease for the years 2017 and 2018 Date Account titles and Explanation credit Debit $68000 5/1/17 $68000 $ 15138.16 $15138.16 Right to use Asset aic lease liability ale (To record the lease) lease liability al cash ac (To record the firstlease payment) Interest Expense alc Interest payable at Cto record Interest Expenses) 12/31/17 $2819.30 $2819.30

1/1/18 2819.30 2819.30 Interest payable aic Interest Expense alc (To Tecord reverse entry made for Interest Expense) 5/1/18 $10909.21 $4228.95 Tease liability alc Interest Expense aic Cash alc Cto record second lease payment) $15138.16 12131/18 $2237.47 Interest Expense alc Interest payable arc (To record Interest Expense) $2237.47

| $6800 [12/31/17 | Amortization Expense alc Right to use Asset aic (To record Amortization of the right of use Asset $6800

12/31/18 $6800 | $6800 Amortization Expence alc Right to use Asset ale (To record Amortization of the Rignt of use Asset

Working Note : 0 Amortization Expense :- Amortization Expense = Cost - Salvage value useful life of Asset = $68000 - $0 10 years = $6800 Interest Expense on 12131/1997 loo Interest Expense = $ 41952.63x 8 x 8months on 12/31/18 - $ 2237.47 12 months