Reference no: EM133036854
Question - Pharoah Ltd., which uses ASPE, recently expanded its operations into an adjoining municipality, and on March 30, 2020, it signed a 15-year lease with its Municipal Industrial Commission (MIC). The property has a total fair value of $495,000 on March 30, 2020, with one third of the amount attributable to the land and two thirds to the building. The land is expected to double in value over the next 15 years, while the building will depreciate by 60%. The lease includes a purchase option at the end of the lease that allows Pharoah to receive title to the property for a payment of $266,100, which is considered a BPO.
Pharoah is required to make rental payments of $24,600 annually, with the first payment due March 30, 2020. The MIC's implicit interest rate, known to all, is 7%. The building's economic life is estimated at 25 years, at which time it will have a small residual value of $40,000.
a) Using time value of money tables, a financial calculator, or Excel functions, calculate the PV of the lease obligation.
b) Prepare the entry required by Pharoah on the signing of the lease and the payment of the first lease payment.
c) Assuming that Pharoah's year end is December 31, prepare the entries that are required on December 31, 2020, March 30, 2021, and December 31, 2021. Pharoah does not use reversing entries.
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