A18-13 Lessee Accounting; Financial Statement Presentation: Sondheim Ltd. entered into a lease with New Age Leasing Corp. The lease is for new specialized factory equipment that has a fair value of $3,200,000. The expected useful life of the equipment is 10 years, although its physical life is 12 years. The initial lease term begins on 1 April 20X2 and runs for 10 years. Annual lease payments are $400,000, payable at the beginning of each lease year. After the initial lease term, Sondheim has the option of renewing the lease on a year-by-year basis for as long as Sondheim wishes. Since the equipment will be obsolete by that time, Sondheim is not interested in obtaining title to the equipment. Other information is as follows: . The interest rate implicit in the lease is 7% (known by Sondheim); Sondheim's incremental borrowing rate is 6%. . Sondheim will amortize the equipment on a straight-line basis and has a 31 December fiscal year-end. Required: 1. Prepare the journal entries relating to the lease liability and the leased equipment for Sondheim for 20X2, including all appropriate adjusting entries. 2. What amounts will appear on Sondheim's SFP and SCF for the year ended 31 December 20X2? Solution