1. 2. Sheffield Corporation entered into a lease agreement on January 1, 2020, to provide Pharoah Company with a piece of machinery. The terms of the lease agreement were as follows. The lease is to be for 3 years with rental payments of $14,821 to be made at the beginning of each year. The machinery has a fair value of $65,000, a book value of $40,000, and an economic life of 8 years. At the end of the lease term, both parties expect the machinery to have a residual value of $25,000, none of which is guaranteed. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature. 5. The implicit rate is 4%, which is known by Dawkins. Collectibility of the payments is probable. 3. 4. 6. Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a operating lease and for the lessor, it is a operating lease Your answer is correct. Prepare the amortization schedules Pharoah will use over the lease term. PHAROAH COMPANY Lease Amortization Schedule Annuity-Due Basis Interest Reduction of on Liability Lease Liability Annual Payment Lease Liability 42775 ) $ 14821 $ 0 $ 14821 27954 1 14821 1118 13703 14251 2 14821 570 14251 0 Amortization on (A) Straight-Line Expense (B) Interest on Lease Liability Right-of-Use Asset (and Liability) (A-B) Carrying Value of Right-of-Use Asset $ 42775 14821 $ 1118 $ $ 13703 29072 14821 570 14251 14821 14821 0 14821 0 Your answer is correct Prepare the 2020 journal entries for Pharoah. (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 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places eg. 58,971.) Date Account Titles and Explanation Debit Credit Right-of-Use Asset Jan. 1 42775 42775 Lease Liability (To record lease) Lease Liability Jan. 1 14821 Cash 14821 (To record first lease payment) Lease Expense Dec. 31 14821 Lease Liability 1118 Right-of-Use Asset 13703 Prepare the 2020 journal entries for Sheffield. (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 for the amounts. Round present value factor calculations to 5 decimal places, eg. 1.25124 and the final answer to 0 decimal places eg. 58,971.) Debit Credit Date Account Titles and Explanation Jan. 1 Lease Receivable 14821 14821 Lease Revenue (To record lease payments) Lease Liability Dec. 31 14821 14821 Lease Revenue (To record lease revenue) Depreciation Expense Dec. 31 5000 5000 Amortization Expense (To record depreciation)
