Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $27,300 at the beginning of each year. The first payment is received on January 1, 2017. Pharoah had purchased the machine during 2016 for $150,000. Collectibility of lease payments by Pharoah is probable. Pharoah set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Pharoah at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Pharoah, and Dexter's incremental borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $19,000. Compute the amount of the lease liability and right-of-use asset for Dexter, and prepare all necessary journal entries for Dexter for 2017.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

am. 01.

Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of
$27,300 at the beginning of each year. The first payment is received on January 1, 2017. Pharoah had purchased the machine during 2016 for $150,000. Collectibility of lease
payments by Pharoah is probable. Pharoah set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and
reverts to Pharoah at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Pharoah, and Dexter's incremental
borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $19,000.
Compute the amount of the lease liability and right-of-use asset for Dexter, and prepare all necessary journal entries for Dexter for 2017.
Transcribed Image Text:Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $27,300 at the beginning of each year. The first payment is received on January 1, 2017. Pharoah had purchased the machine during 2016 for $150,000. Collectibility of lease payments by Pharoah is probable. Pharoah set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Pharoah at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Pharoah, and Dexter's incremental borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $19,000. Compute the amount of the lease liability and right-of-use asset for Dexter, and prepare all necessary journal entries for Dexter for 2017.
Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Lease accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education