Problem 21-1

Pharoah Leasing Company agrees to lease machinery to Novak Corporation on January 1, 2017. 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 $569,000, and the fair value of the asset on January 1, 2017, is $682,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $101,000. Novak depreciates all of its equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6.		Pharoah desires a 9% rate of return on its investments. Novaks incremental borrowing rate is 10%, and the lessors implicit rate is unknown.

(Assume the accounting period ends on December 31.)

A) Calculate the amount of the annual rental payment required.

B)Compute the present value of the minimum lease payments.

C)

)

D) Prepare the journal entries Pharoah would make in 2017 and 2018.

List of accounts:

Accounts Payable Accumulated DepreciationBuilding Accumulated DepreciationCapital Leases Accumulated DepreciationEquipment Airplanes Buildings Cash Cost of Goods Sold Depreciation Expense Equipment Executory Costs Executory Costs Payable Insurance Expense Interest Expense Interest Payable Interest Receivable Interest Revenue Inventory Land Leased Buildings Leased Equipment Leased Land Lease Liability Lease Receivable Loss on Capital Lease Machinery Maintenance and Repairs Expense No Entry Prepaid Lease Executory Costs Property Tax Expense Property Tax Payable Rent Expense Rent Payable Rent Receivable Rent Revenue Revenue from Sale-Leaseback Salaries and Wages Expense Sales Revenue Selling Expenses Trucks Unearned Profit on Sale-Leaseback Unearned Service Revenue

Your answer is partially correct. Try again. Prepare the journal entries Novak would make in 2017 and 2018 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 o for the amounts. Round answers to o decimal places e.g. 58,971.) Date Debit Credit Account Titles and Explanation TLeased Equipment T1/1/17 Lease Liability (To record the lease.) (To record lease payment.) 12/31/17 | Depreciation Expense Accumulated Depreciation-Capital Leases (To record depreciation.) Interest Expense Interest Payable (To record interest.) 1/1/18 TEE.......... (To record depreciation.) ........ (To record interest.) Date Account Titles and Explanation Debit Credit 1/1/17 (To record the lease.) .... .. (To record lease payment.)