Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The followi

Question

Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.

Using the original facts of the lease, show the journal entries to be made by both Pharoah and Walsh in 2017.

1. The lease term is 5 years, with equal annual rental payments of $3,587 at the beginning of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $16,800, a book value to Pharoah of $9,800, and a useful life of 6 years. 4. At the end of the lease term, Pharoah and Walsh expect there to be an unguaranteed residual value of $2,450. 5. Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

Explanation / Answer

Finance / Capital Lease as the lease term is greater than 75% of the economic life of assets.

The Lease term is 5 / 6 i.e.83.33% of the Assets Economic Life.

Present Value of minimum lease payment = Annual lease amount * PVAF 9% for 5 years at begining of year

= $3587 * 3.8896 = $13952

Jounral Entries :-

S. no. Particulars Debit ($) Credit ($) In books of lessee Walsh 1 Lease Building A/c Dr. 13952 To Lease Liability a/c 13952 2 Lease Liability A/c Dr. 3587 To Cash 3587 3 Depreciation Expense A/c Dr. 2790.4 To Accumulated Depreciation ($13952/5) 2790.4 4 Interest Expense A/c Dr.($13952-$3587)*9% 933 To Interest Payable A/c 933 In Book of Lessor Pharoah 5 Lease Receivable A/c Dr. 13952 To Building A/c 13952 6 Cash A/c Dr. 3587 To Finance Income 3587

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.