Question

Pharoah Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $93,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Pharoah expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved

Prepare the journal entry at commencement of the lease for Pharoah.

Prepare the journal entry at commencement of the lease for Sharrer

Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Pharoah’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $10,500.

Answer 1

Lease payment annualy = Fair Value / PVF (cumulative) for 3 year at 8%
Lease payment annualy = 93000/2.577 = $ 36,088
Amortisation Table for Lease				$ millions
Year	Op. Liability	Lease Payment	Interest @ 8 %	Liability reduction	Closing Liability
(a)	(b)	(c )	(d=b* 8%)	(e=c-d)	(f=b-e)
2020	93,000	36,088	7,440	28,648	64,352
2021	64,352	36,088	5,148	30,940	33,412
2022	33,412	36,088	2,676	33,412	0
Total		1,08,264	15,264	93,000
Journal entry at the commencement of lease for pharoah
This is the Finance lease as lessee has option to acquire the same at the end of
lease.
		$	$
Lease Assets A/c….................Dr	93,000
To Leased Liability A/c		93,000
Journal entry at the commencement of lease for Sharrer
		$	$
Leased Receivable A/c….........Dr	93,000
To Fix Assets A/c			65,000
To Deferred Revenue A/c		28,000
(1) Journal entry if sharrer's IRR is 9% and incurred direct cost of $ 10,500
		$	$
Leased Receivable A/c….........Dr	93,000
To Fix Assets A/c			65,000
To Misc. Expenses		10,500
To Deferred Revenue A/c		17,500
Misc. Expenses A/c…..............Dr	10,500
To Cash			10,500