Question

On January 1, 2021, Pharoah, Inc. signed a 10-year noncancelable lease for a heavy duty drill press. the lease stipulated annual payments of $340,000 starting at the beginning of the first year, with title passing to Pharoah at the expiration of the lease. Pharoah treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Pharoah uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $2,002,339, based on implicit interest of 11%.In its 2021 income statement, what amount of interest expense should Pharoah report from this lease transaction

Answer 1

$182,857.29

Step-by-step explanation:

Here, Pharoah, Inc. average lease payments have a present value of $2,002,339

First lease payment = $340,000

Interest rate = 11%

To find the interest rate, first deduct the first lease payment.

$2,002,339 - $340,000

= $1,662,339

This is deducted so as to reduce total lease liability.

Find the amount of interest expense:

$1,662,339 × interest rate

= $1,662,339 × 11%

= $182,857.29

In its 2021 income statement, the amount of interest expense Pharoah should report from this lease transaction is $182,857.29