Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on J

Question

Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $27,300 at the beginning of each year. The first payment is received on January 1, 2017. Pharoah had purchased the machine during 2016 for $150,000. Collectibility of lease payments by Pharoah is probable. Pharoah set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Pharoah at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Pharoah, and Dexter’s incremental borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $19,000.

Compute the amount of the lease liability and right-of-use asset for Dexter, and prepare all necessary journal entries for Dexter for 2017.

Explanation / Answer

Calculation of present value of minimum lease payment

Statement showing apportionment of minimum lease payments

Journal entries in the books of Dexter Corporation

                Machinery - Debit                            $163,016

                                To Lease liability - Credit               $163,016

                (being asset taken on lease)

                Deprecation - Debit        $15,000

                ($150,000/10 years)

                                To Machinery - Credit    $15,000

                (being depreciation charged)

               

                Lease liability - Debit                       $15,889

                Interest expense - Debit                              $11,411

                                To Lease rent - Credit                     $27,300

                (being lease rent is due)

                Lease rent - Debit            $27,300

                                To Cash - Credit                                $27,300

                (being rent paid off)

                Profit and loss - Debit                     $26,411

                                To Depreciation                - Credit                 $15,000

                                To Interest expense - Credit       $11,411

                (being normal expenses transferred t profit and loss account)

Minimum Lease payment PV Factor Present Value $27,300 0.9346 $25,514 $27,300 0.8734 $23,845 $27,300 0.8163 $22,285 $27,300 0.7629 $20,827 $27,300 0.7130 $19,465 $27,300 0.6663 $18,191 $27,300 0.6227 $17,001 $27,300 0.5820 $15,889 $2,18,400 $1,63,016

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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