Reference no: EM132580008

On January 1, 2020, Pharoah Corp., which uses IFRS, signs a 10-year, non-cancellable lease agreement to lease a specialty lathe from Liu Inc. The following information concerns the lease agreement.

1. The agreement requires equal rental payments of $83,806 beginning on January 1, 2020.

2. The lathe's fair value on January 1, 2020, is $530,000.

3 The lathe has an estimated economic life of 12 years, with an unguaranteed residual value of $18,000. Pharoah Corp. depreciates similar equipment using the straight-line method.

4. The lease is non-renewable. At the termination of the lease, the lathe reverts to the lessor.

5. Pharoah's incremental borrowing rate is 11% per year. The lessor's implicit rate is not known by Pharoah Corp.

6. The yearly rental payment includes $2,729.64 of executory costs related to insurance on the lathe.

Assume this is a manufacturer/dealer lease.

Question 1: Assume that Pharoah's fiscal year end is May 31. Prepare the journal entries on Pharoah Corp.'s books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the calendar years 2020 and 2021. Pharoah does not prepare reversing entries.

Question 2: prepare following journal entries :

1. To record lease payment on Jan 01,2020 and Jan 01,2021
2. To record depreciation expense on May 31,2020 and May 31,2021
3. To record interest on May 31,2020 and May 31,2021
4. To record expired insurance Dec 31,2020 and Dec 31,2021