You are a senior auditor auditing the December 31, 2023 financial statements of Pharoah Inc., a manufacturer of novelties and party favours and a user of ASPE. During your inspection of the company garage, you discovered that a 2022 automobile is parked in the company garage but is not listed in the equipment subsidiary ledger. You ask the plant manager about the vehicle, and she tells you that the company did not list the automobile because the company is only leasing it. The lease agreement was entered into on January 1, 2023, with Quick Deal New and Used Cars. You decide to review the lease agreement to ensure that the lease should be given operating lease treatment, and you discover the following lease terms: 1. 2. 3. 4. 5. It has a non-cancellable term of 50 months. The rental is $250 per month at the end of each month. (The PV at 1% per month is $9,799.) The estimated residual value after 50 months is $2,400. (The PV at 1% per month is $1,459.) Pharoah guarantees the residual value of $2,400. The automobile's estimated economic life is 60 months. Pharoah's incremental borrowing rate is 12% per year (1% per month).
You are a senior auditor auditing the December 31, 2023 financial statements of Pharoah Inc., a manufacturer of novelties and party favours and a user of ASPE. During your inspection of the company garage, you discovered that a 2022 automobile is parked in the company garage but is not listed in the equipment subsidiary ledger. You ask the plant manager about the vehicle, and she tells you that the company did not list the automobile because the company is only leasing it. The lease agreement was entered into on January 1, 2023, with Quick Deal New and Used Cars. You decide to review the lease agreement to ensure that the lease should be given operating lease treatment, and you discover the following lease terms: 1. 2. 3. 4. 5. It has a non-cancellable term of 50 months. The rental is $250 per month at the end of each month. (The PV at 1% per month is $9,799.) The estimated residual value after 50 months is $2,400. (The PV at 1% per month is $1,459.) Pharoah guarantees the residual value of $2,400. The automobile's estimated economic life is 60 months. Pharoah's incremental borrowing rate is 12% per year (1% per month).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:You are a senior auditor auditing the December 31, 2023 financial statements of Pharoah Inc., a manufacturer of novelties and party
favours and a user of ASPE. During your inspection of the company garage, you discovered that a 2022 automobile is parked in the
company garage but is not listed in the equipment subsidiary ledger. You ask the plant manager about the vehicle, and she tells you
that the company did not list the automobile because the company is only leasing it. The lease agreement was entered into on January
1, 2023, with Quick Deal New and Used Cars. You decide to review the lease agreement to ensure that the lease should be given
operating lease treatment, and you discover the following lease terms:
1.
2.
3.
4.
5.
It has a non-cancellable term of 50 months.
The rental is $250 per month at the end of each month. (The PV at 1% per month is $9,799.)
The estimated residual value after 50 months is $2,400. (The PV at 1% per month is $1,459.) Pharoah guarantees the
residual value of $2,400.
The automobile's estimated economic life is 60 months.
Pharoah's incremental borrowing rate is 12% per year (1% per month).
Transcribed Image Text:-
Your answer is partially correct.
Prepare the journal entries to adjust for the accounting error and to record depreciation. (List all debit entries before credit entries.
Credit account titles are automatically indented when the 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 answers to O decimal places, e.g. 5,275.)
Date
December
31, 2023
December
31, 2023
Account Titles and Explanation
Obligations under Lease
Interest Expense
Rent Expense
(Correction of error)
Depreciation Expense
Accumulated Depreciation - Vehicles under Lease
(To record depreciation expense)
Debit
2814
186
2352
Credit
DOK DO
3000
2352
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