Reference no: EM132761205
Pharoah Leasing Limited, which has a fiscal year end of October 31 and follows IFRS 16, signs an agreement on January 1, 2020, to lease equipment to Irvine Limited. The following information relates to the agreement.
1. The term of the non-cancellable lease is six years, with no renewal option. The equipment has an estimated economic life of eight years.
2. The asset's cost to Pharoah, the lessor, is $310,000. The asset's fair value at January 1, 2020, is $310,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $45,553, which is not guaranteed.
4. Irvine Limited, the lessee, assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2020.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties about costs that have not yet been incurred by the lessor.
Problem 1: Assuming that Pharoah Leasing desires a 9% rate of return on its investment, use time value of money tables, a financial calculator, or Excel functions to calculate the amount of the annual rental payment that is required. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)
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