Question

Sheffield Corporation entered into a lease agreement on January 1, 2017, to provide Pharoah Company with a piece of machinery. The terms of the lease agreement were as follows. 1. The lease is to be for 3 years with rental payments of $13,700 to be made at the beginning of each year. 2. The machinery has a fair value of $65,000, a book value (depreciable base for the lessor) of $40,000, and an economic life of 8 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of $25,000, none of which is guaranteed. 4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature. 5. The implicit rate is 4%, which is known by Dawkins. 6. Collectibility of the payments is probable. Click here to view the factor table.

(b) Prepare the amortization schedules Pharoah will use over the lease term. PHAROAH COMPANY Lease Amortization Schedule Annuity-Due Basis Date Annual Payment Interest on Liability Reduction of Lease Liability Lease Liability 1/1/17 $ 1/1/17 $ $ $ 1/1/18 1/1/19 Click if you would like to Show Work for this question: Open Show Work

Answer 1

Lease Amortisation Schedule
Date	Beg Bal of Lease Liability	Interest on Lease Liability	Reduction of Lease Liability	Annual Lease Payment	End Bal of Lease Liability
	a	b=a*4%	c=d-b	d	a-c
1/1/2017	$39,540				$39,540
1/1/2017	$39,540			$13,700	$25,840
1/1/2018	$25,840	$1,033.60	$12,666	$13,700	$13,174
1/1/2019	$13,174	$526.94	$13,173	$13,700	$1

Computation of Present Value of Lease Rental
Annual Lease Rental	$13,700
Cumm PVAF @ 4% for 0-2	2.8861
PV of Lease Rental (13700X2.8861)	$39,540