Pharoah Corporation manufactures specialty equipment with an estimated economic life of 12 years and leases it to ProvincialAirlines Corp. for a period of 10 years. Both Pharoah and Provincial Airlines follow ASPE. The equipment's normal selling price is$210,482 and its unguaranteed residual value at the end of the lease term is estimated to be $13,000. Provincial Airlines will makeannual payments of $22,600 at the beginning of each year and pay for all maintenance and insurance. Pharoah incurred costs of$105,000 in manufacturing the equipment and $7,000 in negotiating and closing the lease. Pharoah has determined that thecollectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interestrate is 8%. Provincial Airlines Corp. has an incremental borrowing rate of 8%.Click here to view the factor table PRESENT VALUE OF 1.Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE.(b)What classification will Provincial Airlines give to the lease?The lease will be classified as

The objective of the question is to determine the classification of the lease for Provincial…

Answered: Pharoah Corporation manufactures…

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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On 31 December 20X0, Columbia Inc. entered into an agreement with Scotia Ltd. to lease equipment with a useful life of 6 years. Columbia Inc. will make four equal payments of $141,000 at the beginning of each lease year. Columbia Inc. anticipates that the equipment will have a residual value of $96,000 at the end of the lease, net of removal costs. Columbia Inc. has the option of extending the lease by (1) paying $96,000 to retain the equipment or (2) allowing Scotia Ltd. to remove it. Scotia Ltd.’s implicit interest rate in this lease is 8%. Columbia Inc.’s incremental borrowing rate is 9%. Columbia Inc. depreciates the leased equipment on a straight-line basis. The lease commences on 1 January 20X1. Assume that the fair value of the equipment on the open market is greater than the present value of the lease payments. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare a lease liability amortization table for this lease for…
NutraLabs, Incorporated, leased a protein analyzer to Werner Chemical, Incorporated, on September 30, 2024. • NutraLabs manufactured the machine at a cost of $5 million. • The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, and June 30, with the first payment on September 30, 2024. • NutraLabs' implicit interest rate is 12%. • The useful life of the equipment is five years. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Determine the price at which NutraLabs is "selling" the equipment (present value of the lease payments) on September 30, 2024 2. What pretax amounts related to the lease would NutraLabs report in its balance sheet on December 31, 2024? 3. What pretax amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2024? 4. What pretax amounts related…
Telephone Limited signed a contract with Machinery Leasing Company at 1st January 2020 to lease a machine. The agreement consists in 10 equal annual payments of $300,000 at the beginning of each year with an interest rate of 15%. The yearly rental payment includes $30,000 of executory costs related to insurance on the machine. The executory costs of $30,000 are paid to the lessor each year. There is an option to purchase the machine at the end of the lease term for $50,000. The machine has an estimated useful life of 14 years and a guaranteed residual value of $20,000. Both companies adopt straight-line depreciation method for all items of PPE. Consider a PVIF (n=10, i=15%) of 0.2472 and PVIFA (n=10, i=15%) of 5.0188. The balance day for Telephone Limited and Machinery Leasing Company is 31 of December. Required(Round all numbers to the nearest dollar) a) Discuss the nature of this lease to Telephone Limited. b) Discuss the nature of this lease to Machinery Leasing Company. c)…
American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. The lease agreement for the $4.1 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be five years with no residual value. Barton and Barton's implicit interest rate was 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2021. 2. Prepare an amortization schedule for the four-year term of the lease. 3. & 4. Prepare the appropriate entries related to the lease on December 31, 2021 and 2023. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Prepare the appropriate entries related to the lease…
Callaway Golf Co. leases telecommunications equipment from Sandhill Company. Assume the following data for equipment leased from Sandhill Company. The lease term is 5 years and requires equal rental payments of $30,380 at the beginning of each year. The equipment has a fair value at the commencement of the lease of $147,000, an estimated useful life of 8 years, and a guaranteed residual value at the end of the lease of $15,190. Sandhill set the annual rental to earn a rate of return of 6%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain purchase option, and is not a specialized asset. How should Callaway classify this lease? ✓ Finance lease Operaing lease Sales-type lease
Cullumber Inc manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $505,456. and its guaranteed residual value at the end of the non- cancelable lease termis estimated to be $16,400. The hospital will pay rents of $61,100 at the beginning of each year. Cullumber incurred costs of $227,000 in manufacturing the machine and $13400 in legal fees directly related to the signing of the lease. Cullumber has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Discuss the nature of this lease in relation to the lessor. The nature of this lease in relation to the lessor is Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and the final answers to 0 decimai places, eg. 5,275.) (1) Lease receivable at commencement of the lease (2) Sales price…
Bravo Manufacturing Company is negotiating with a customer for the lease of a large machine manufactured by Bravo. The machine has a cash price of $780,000. Bravo wants to be reimbursed for financing the machine at a 12% annual interest rate over the five-year lease term.
Crane SA manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is R$594,813, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be R$18,000. The hospital will pay rents of R$72,000 at the beginning of each year. Crane incurred R$410,000 in manufacturing cost and R$14,200 in legal fees directly related to the signing of the lease. Crane has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Click here to view factor tables. Discuss the nature of this lease in relation to the lessor. The nature of this lease in relation to the lessor is Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to O decimal places, e.g. 5,275.) (1) (2) (3) Lease receivable at commencement of the…
Kingbird Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is $304,659, and its unguaranteed residual value at the end of the lease term is estimated to be $19.400. National will pay annual payments of $40,800 at the beginning of each year. Kingbird incurred costs of $164,100 in manufacturing the equipment and $3,900 in sales commissions in closing the lease. Kingbird has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 8%. Click here to view factor tables. (a) Discuss the nature of this lease in relation to the lessor. This is a sales-type lease Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and the final answers to O decimal places, eg. 5.275) (1) Lease receivable S (2) Sales price S (3) Cost of sales $
On January 1, James Industries leased equipment to a customer for a six-year period, at which time possession of the leased asset will revert back to James. The equipment cost James $760,000 and has an expected useful life of eight years. Its normal sales price is $760,000. The residual value after six years is $100,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 8%. Calculate the amount of the annual lease payments. Chart to Use: Table or calculator function: Amount to be recovered (fair value) Present value of the residual value Table or calculator function: S Amount to recovered through periodic lease payments Lease Payment Amount of each annual lease payment. Residual Value n= i= n= i= Present value Lease Payments
Wildhorse, Inc. manufactures machinery used in the mining industry. On January 2, 2021 it leased equipment with a cost of $570000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $190966 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 9%, and it depreciates similar equipment using the double - declining balance method. The selling price of the equipment is $870000, and the rate implicit in the lease is 7%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2021? $696000 $522000 $870000 $556800
On January 1, 2018, QuickStream Communications leased telephone equipment from Digium, Inc. Digium's cash selling price for the equipment is $2,218,982. The lease agreement specifies six annual payments of $480,000 beginning December 31, 2018, and at each December 31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year and (b) 3 percent. The CPI at the beginning of the lease is 150. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 8%. Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2018.

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