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Pharoah Company on January 1, 2021, enters into a 9-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair
Pharoah Company on January 1, 2021, enters into a 9-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of $4,440,000. Pharoah's incremental borrowing rate is 8%. Pharoah uses the straight-line method to depreciate its assets. The lease contains the following provisions:
1. | Rental payments of $300,000 for property taxes, payable at the beginning of each six-month period. | |
2. | An option allowing the lessor to extend the lease one year beyond the lease term. | |
3. | A guarantee by Pharoah Company that Daly Corp. will realize $205,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $150,000. |
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