Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017....
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Pharoah Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $27,300 at the beginning of each year. The first payment is received on January 1, 2017. Pharoah had purchased the machine during 2016 for $150,000. Collectibility of lease payments by Pharoah is probable. Pharoah set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Pharoah at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Pharoah, and Dexters incremental borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $19,000.
Compute the amount of the lease liability and right-of-use asset for Dexter, and prepare all necessary journal entries for Dexter for 2017.
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