On January 1, 2017, Pharoah Company leased equipment to Packer Corporation The following information pertains to this lease 1 The term of the noncancelable lease is 5 years At the end of the lease term, Packer has the option to purchase the equipment for $9,000, while the expected residual value at the end of the lease is $14,000 2 Equal rental payments are due on January 1 of each year, beginning in 2017 3 The fair value of the equipment on January 1, 2017, is $210,000, and its cost is $158,000 4 The equipment has an economic life of 6 years Packer depreciates all of its equipment on a straight line basis 5 Pharoah set the annual rental to ensure a 6 rate of return Packers incremental borrowing rate is 7 , and the implicit rate of the lessor is unknown 6 Collectibility of lease payments by the lessor is probable Both the lessor and the lessees accounting periods end on December 31 Prepare all the necessary journal entries for Packer for 2017 (Credit account titles are automa places, e g 5,275 ) Date Account Titles and Explanation Debit Credit 1 1 17 Right of Use Asset 210000 Lease Liability To record the lease) Lease Liability 210000 45525 Cash 45525 To record the receipt of lease payment) 12 31 17 Amortization Expense 35000 Right of Use Asset 35000 To record amortization of the right of use asset) Interest Expense 11513 11513 To record interest expense)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 31, 2024

On January 1, 2017, Pharoah Company leased equipment to Packer Corporation. The following information pertains to this lease. 1. The term of the noncancelable lease

On January 1, 2017, Pharoah Company leased equipment to Packer Corporation. The following information pertains to this lease.

1.		The term of the noncancelable lease is 5 years. At the end of the lease term, Packer has the option to purchase the equipment for $9,000, while the expected residual value at the end of the lease is $14,000.
2.		Equal rental payments are due on January 1 of each year, beginning in 2017.
3.		The fair value of the equipment on January 1, 2017, is $210,000, and its cost is $158,000.
4.		The equipment has an economic life of 6 years. Packer depreciates all of its equipment on a straight-line basis.
5.		Pharoah set the annual rental to ensure a 6% rate of return. Packers incremental borrowing rate is 7%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments by the lessor is probable.

Both the lessor and the lessees accounting periods end on December 31.

image text in transcribed

Prepare all the necessary journal entries for Packer for 2017. (Credit account titles are automa places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit 1/1/17 Right-of-Use Asset 210000 Lease Liability To record the lease) Lease Liability 210000 45525 Cash 45525 To record the receipt of lease payment) 12/31/17 Amortization Expense 35000 Right-of-Use Asset 35000 To record amortization of the right-of-use asset) Interest Expense 11513 11513 To record interest expense)