5. Wildhorse Leasing Company agrees to lease equipment to Sheffield Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $541,000, and the fair value of the asset on January 1, 2020, is $760,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Sheffield estimates that the expected residual value at the end of the lease term will be 45,000. Sheffield amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Wildhorse desires a 10% rate of return on its investments. Sheffield's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

(Assume the accounting period ends on December 31.) Click here to view factor tables.

(a)

Discuss the nature of this lease for both the lessee and the lessor. This is a sales-type leaseoperating leasefinance lease for Sheffield. This is a finance leasesales-type leaseoperating lease for Wildhorse.

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(b)

Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Annual rental payment

$

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(c)

Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Present value of minimum lease payments

$

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(d)

Prepare the journal entries Sheffield would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/201/1/2112/31/21
	(To record the lease.)
	(To record lease payment.)
1/1/2012/31/201/1/2112/31/21
	(To record amortization.)
	(To record interest.)
1/1/2012/31/201/1/2112/31/21
1/1/2012/31/201/1/2112/31/21
	(To record amortization.)
	(To record interest.)

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(e)

Prepare the journal entries Wildhorse would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/201/1/2112/31/21
	(To record the lease.)
1/1/2012/31/201/1/2112/31/21
	(To record lease payment.)
1/1/2012/31/201/1/2112/31/21
1/1/2012/31/201/1/2112/31/21
1/1/2012/31/201/1/2112/31/21

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(f)

Suppose Sheffield expects the residual value at the end of the lease term to be $35,000 but still guarantees a residual of $45,000. Compute the value of the lease liability at lease commencement.

Lease liability

$

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• Accounts Payable
• Accumulated Depreciation-Buildings
• Accumulated Depreciation-Leased Buildings
• Accumulated Depreciation-Capital Leases
• Accumulated Depreciation-Equipment
• Accumulated Depreciation-Leased Equipment
• Accumulated Depreciation-Leased Machinery
• Accumulated Depreciation-Machinery
• Accumulated Depreciation-Right-of-Use Asset
• Advertising Expense
• Amortization Expense
• Airplanes
• Buildings
• Cash
• Cost of Goods Sold
• Deferred Gross Profit
• Deposit Liability
• Depreciation Expense
• Equipment
• Executory Costs
• Executory Costs Payable
• Gain on Disposal of Equipment
• Gain on Disposal of Plant Assets
• Gain on Lease
• Gain on Sale of Buildings
• Insurance Expense
• Interest Expense
• Interest Payable
• Interest Receivable
• Interest Revenue
• Inventory
• Land
• Leased Asset
• Leased Buildings
• Leased Equipment
• Lease Expense
• Leased Land
• Lease Liability
• Lease Receivable
• Lease Revenue
• Legal Expense
• Loss on Capital Lease
• Machinery
• Maintenance and Repairs Expense
• Notes Payable
• Prepaid Lease Executory Costs
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• Property Tax Expense
• Property Tax Payable
• Rent Expense
• Rent Payable
• Rent Receivable
• Rent Revenue
• Revenue from Sale-Leaseback
• Right-of-Use Asset
• Salaries and Wages Expense
• Sales Revenue
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• Trucks
• Unearned Profit on Sale-Leaseback
• Unearned Lease Revenue
• Unearned Service Revenue