### Educational Content: Understanding Lease Income CalculationPharoah Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time, the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Pharoah for $5950000 instead of leasing it. Pharoah's accounting records showed a book value for the equipment on May 1, 2021, of $4450000. Pharoah’s depreciation on the equipment in 2021 was $650000. During 2021, Riggs paid $1308000 in rentals to Pharoah for the 8-month period. Pharoah incurred maintenance and other related costs under the terms of the lease of $1090000 in 2021. After the lease with Riggs expires, Pharoah will lease the equipment to another company for two years.#### Problem:The income before income taxes derived by Pharoah from this lease for the year ended December 31, 2021, should be:- ⬜ $650000.- ⬜ $1308000.- ⬜ $549000.- ⬜ $1191000.#### Detailed Analysis and Solution:First, we calculate the total rental income received in 2021: - **Rental Income for 2021:** $1308000Next, we consider the depreciation and maintenance costs incurred in 2021: - **Depreciation (2021):** $650000 - **Maintenance and Other Costs:** $1090000#### Calculation:\[ \text{Income Before Taxes} = \text{Rental Income} - (\text{Depreciation} + \text{Maintenance \& Other Costs}) \]\[ \text{Income Before Taxes} = \$1308000 - (\$650000 + \$1090000) \]\[ \text{Income Before Taxes} = \$1308000 - \$1740000 \]\[ \text{Income Before Taxes} = -\$432000 \]So, it appears there is a miscalculation in the options provided. If you calculate it as per the given data, Pharoah Co. would actually incur a net loss of -$432000. The options provided do not cater to making a default assumption for costs.Therefore, reconsidering

Option (c). $549,000 is the correct answer

Pharoah Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Pharoah for

Pharoah Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Pharoah for

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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