Question

Exercise 21-12 (Part Level Submission) On January 1, 2020, Pharoah Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $9,000.

2. Equal rental payments are due on January 1 of each year, beginning in 2020.

3. The fair value of the equipment on January 1, 2020, is $120,000, and its cost is $110,000.

4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.

5. Pharoah set the annual rental to ensure a 6% rate of return. Flynn’s incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown.

6. Collectibility of lease payments by the lessor is probable.

Both the lessor and the lessee’s accounting periods end on December 31.

(e)

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Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20
	(To record the lease)
1/1/2012/31/20
	(To record the lease payment)
1/1/2012/31/20
	(To record amortization of the right-of-use asset)
1/1/2012/31/20
	(To record interest expense)

Answer 1

Lets compute the annual rental/lease paayment amount first -

Amount to be recovered = 120,000

Less present value of residual (6% for 6 years is 0.7050) = 9000*0.7050 = 6,345

Present value of annual payments = 120000-6345 = 113,655

Annuity factor at 6% for 6 years = 4.2124+1 = 5.2124

Annual payment value = 113655/5.2124 = 21,808

ate	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20	Lease equipment under lease(21,808*(1+3.9927))	108,881
	Lease liability		108,881
	(To record the lease)
1/1/2012/31/20	Lease liability	21,808
	Cash		21,808
	(To record the lease payment)
1/1/2012/31/20	interest expense (108,881 - 21,808)*8%	6,966
	Cash		6,966
	To record Interest
1/1/2012/31/20	Depreciation(108,881/8)	13,610
	Accumulated depreciation		13,610
	To record amortization of the right-of-use asset)