Pharoah Leasing Company agrees to lease equipment to Novak Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $473,000, and the fair value of the asset on January 1, 2020, is $746,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Novak estimates that the expected residual value at the end of the lease term will be 50,000. Novak amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Pharoah desires a 10% rate of return on its investments. Novak's incremental borrowing rate is 11%, and the lessor's implicitrate is unknown (Assume the accounting period ends on December 31.) Click here to view factor tables. Your answer is partially correct. Discuss the nature of this lease for both the lessee and the lessor. This is a finance lease for Novak This is a sales-type lease for Pharoah. Your answer is correct. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, es 1.25124 and the final answer to decimal places es. 58,972.) Annual rental payments 134510 eTextbook and Media List of Accounts Your answer is incorrect Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, eg 1.25124 and the final answer to decimal places eg. 58,972) Present value of minimum lease payments $ Prepare the journal entries Novak would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when 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 answers to decimal places e.3.58,972. Record journal entries in the order presented in the problem) Date Debit Credit Account Titles and Explanation Right-of-Use Asset 1/1/20 Lease Liability (To record the lease.) Lease Liability 134510 134510 Cash (To record lease payment.) Amortization Expense 12/31/20 (To record amortization.) (To record interest.) 12/31/20 Lease Liability 12/31/21 MacBook Air (To record interest.) Lease Liability 12/31/20 12/31/21 (To record amortization.) (To record interest.) Prepare the journal entries Pharoah would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and entero for the amounts. Round answers to decimal places eg. 58,972. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit Lease Receivable 1/1/20 Cost of Goods Sold Sales Revenue Inventory (To record the lease.) Cash 1/1/20 Lease Receivable (To record lease payment.) 12/31/20 Interest Revenue 1/1/21 + Cash Lease Receivable 12/31/21 Interesten MacBook Air 1/1/21 Cash Lease Receivable 12/31/21 Interest Revenue eTextbook and Media List of Accounts * Your answer is incorrect. Suppose Novak expects the residual value at the end of this lease term to be $40,000 but still guarantees a residual of $50,000. Compute the value of the lease liability at lease commencement. Lease liability $ e Textbook and Media List of Accounts
