1. On January 1, 2020, Sheridan Company leased equipment to Flynn Corporation. The following information pertains to this lease. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $9.000, 2. Equal rental payments are due on January 1 of each year, beginning in 2020. 3. The fair value of the equipment on January 1, 2020, is $145,000, and its cost is $130,000. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. Sheridan set the annual rental to ensure a 6% rate of return. Flynn's incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. 4. 5. Both the lessor and the lessee's accounting periods end on December 31. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Your answer is correct. Discuss the nature of this lease to Sheridan and Flynn The nature of this lease for Sheridan is a Sales-type lease. finance The nature of this lease for Flynn is a lease. Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.) Annual rental payment $ 27548 Prepare all the necessary journal entries for Sheridan for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to O decimal places, eg. 5,275. Record journal entries in the order presented in the problem.) Debit Credit Date Account Titles and Explanation 145,000 1/1/20 Lease Receivable 130000 Cost of Goods Sold 145,000 Sales Revenue 130.000 Inventory (To record the lease) 27548 1/1/20 Cash 27548 Lease Receivable (To record lease payment) 7047 12/31/20 Lease Receivable 7047 Interest Revenue Suppose the collectibility of the lease payments was not probable for Sheridan, Prepare the necessary journal entry for the company in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 1/1/20 Cash 27548 Deposit Liability 27548 Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to decimal places, eg. 5,275. Record journal entries in the order presented in the problem.) Date Debit Credit Account Titles and Explanation Right-of-Use Asset 1/1/20 Lease Liability (To record the lease) Lease Liability 1/1/20 27548 Cash 27548 (To record the lease payment) Amortization Expense 12/31/20 Right-of-Use Asset (To record amortization of the right-of-use asset) 12/31/20 Interest Expense Lease Liability (To record interest expense)
