Question
Pharoah Corporation enters into an agreement with Flounder Rentals Co. on January 1, 2025 to lease a machine to be used in its manufacturing operations.
Pharoah Corporation enters into an agreement with Flounder Rentals Co. on January 1, 2025 to lease a machine to be used in its manufacturing operations. The following data pertain to the agreement:
The term of the noncancelable lease is 3 years with no renewal option. Payments of $659633 are due on January 1 of each year.
The fair value of the machine on January 1, 2025, is $1820000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
Pharoah depreciates all machinery it owns on a straight-line basis.
Pharoah's incremental borrowing rate is 11% per year. Pharoah does not know the 9% implicit rate used by Flounder.
If Flounder records this lease as a sales-type lease, what amount would be recorded as Lease Receivable at the inception of the lease?
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