Exercise 20-9

On January 1, 2020, Lavery Corp., which follows ASPE, leased equipment to Sheridan Ltd., which follows IFRS 16. Both Lavery and Sheridan have calendar year ends. The following information concerns this lease.

1.The term of the non-cancellable lease is six years, with no renewal option. The equipment reverts to the lessor at the termination of the lease, at which time it is expected to have a residual value (not guaranteed) of $6,400. Sheridan Ltd. depreciates all its equipment on a straight-line basis. 2.Equal rental payments are due on January 1 of each year, beginning in 2020.

3.The equipment's fair value on January 1, 2020, is $147,000 and its cost to Lavery is $111,000.

4.The equipment has an economic life of seven years.

5.Lavery set the annual rental to ensure a 8% rate of return. Sheridan's incremental borrowing rate is 9% and the lessor's implicit rate is unknown to the lessee.

6.Collectibility of lease payments is reasonably predictable and there are no important uncertainties about any unreimbursable costs that have not yet been incurred by the lessor.

Using time value of money tables, a financial calculator, or Excel spreadsheet functions, calculate the amount of the annual rental payment.(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Annual rental payment$

Prepare necessary journal entries and adjusting entries for Sheridan for 2020.(Credit account titles are automatically indented when the 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. Record journal entries in the order presented in the problem. Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.)

Date. Account Titles Dr. Cr.

1)-choose a transaction date

1/1/20. - .

12/31/20

(inception and payment of lease)

2)-choose a transaction date

1/1/20. -

12/31/20

(To record depreciation expense)

3)-

choose a transaction date

1/1/20. - - -

12/31/20

(To record interest.)

Prepare necessary journal entries and adjusting entries for Lavery for 2020.(Credit account titles are automatically indented when the 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. Record journal entries in the order presented in the problem. Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.)

Date A/cTitles Dr. Cr.

1/1/20. .

.

- -

.

.

- -

(To record inception of lease

and cost of goods sold.)

2)-choose a transaction date

1/1/20 . -

12/31/20

(Collection of lease payment.)

3)-choose a transaction date

1/1/20 . -

12/31/20

(to record interest)

Table. Present Value of 1

(n) periods

2%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

15%

1 Periods(n)

0.98039

0.97561

0.97087

0.96156

0.95238

0.94340

0.93458

0.92593

0.91743

0.90909

0.90090

0.89286

0.86957

2(n)

0.96117

0.95181

0.94260

0.92456

0.90703

0.89000

0.87344

0.85734

0.84168

0.82645

0.81162

0.79719

0.75614

3(n)

0.94232

0.92860

0.91514

0.88900

0.86384

0.83962

0.81630

0.79383

0.77218

0.75132

0.73119

0.71178

0.65752

4(n)

0.92385

0.90595

0.88849

0.85480

0.82270

0.79209

0.76290

0.73503

0.70843

0.68301

0.65873

0.63552

0.57175

5(n)

0.90583

0.88385

0.86261

0.82193

0.78353

0.74726

0.71299

0.68058

0.64993

0.62092

0.59345

0.56743

0.49718

6(n)

0.88797

0.86230

0.83748

0.79031

0.74622

0.70496

0.66634

0.63017

0.59627

0.56447

0.53464

0.50663

0.43233

7(n)

0.87056

0.84127

0.81309

0.75992

0.71068

0.66506

0.62275

0.58349

0.54703

0.51316

0.48166

0.45235

0.37594

8(n)

0.85349

0.82075

0.78941

0.73069

0.67684

0.62741

0.58201

0.54027

0.50187

0.46651

0.43393

0.40388

0.32690

9(n)

0.83676

0.80073

0.76642

0.70259

0.64461

0.59190

0.54393

0.50025

0.46043

0.42410

0.39092

0.36061

0.28426

10(n)

0.82035

0.78120

0.74409

0.67556

0.61391

0.55839

0.50835

0.46319

0.42241

0.38554

0.35218

0.32197

0.24719

11(n)

0.80426

0.76214

0.72242

0.64958

0.58468

0.52679

0.47509

0.42888

0.38753

0.35049

0.31728

0.28748

0.21494

12(n)

0.78849

0.74356

0.70138

0.62460

0.55684

0.49697

0.44401

0.39711

0.35554

TableA.5

PRESENT VALUE OF AN ANNUITY DUE OF 1

n( periods). (%8 ). 9%

1. 1.00000 1.00000

2 1.92593 1.91743

3. 2.78326 2.75911

4. 3.57710 3.53130

5. 4.31213 4.23972

6. 4.99271 4.88965

7. 5.62288 5.48592

8. 6.58238 6.03295