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 equipments 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. Sheridans incremental borrowing rate is 9% and the lessors 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.

Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE.

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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

$enter the Annual rental payment in dollars

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Solution

List of Accounts

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Prepare all 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 and Explanation	Debit	Credit
choose a transaction date 1/1/2012/31/20	enter an account title to record inception and payment of lease	enter a debit amount	enter a credit amount
	enter an account title to record inception and payment of lease	enter a debit amount	enter a credit amount
	enter an account title to record inception and payment of lease	enter a debit amount	enter a credit amount
	(To record inception and payment of lease.)
choose a transaction date 1/1/2012/31/20	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	(To record depreciation expense.)
choose a transaction date 1/1/2012/31/20	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount
	(To record interest.)

eTextbook and Media

Solution

List of Accounts

Partially correct answer icon

Your answer is partially correct.

Prepare all 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	Account Titles and Explanation	Debit	Credit
1/1/20	enter an account title to record inception of lease and cost of goods sold	enter a debit amount	enter a credit amount
	enter an account title to record inception of lease and cost of goods sold	enter a debit amount	enter a credit amount
	enter an account title to record inception of lease and cost of goods sold	enter a debit amount	enter a credit amount
	enter an account title to record inception of lease and cost of goods sold	enter a debit amount	enter a credit amount
	enter an account title to record inception of lease and cost of goods sold	enter a debit amount	enter a credit amount
	(To record inception of lease and cost of goods sold.)
choose a transaction date 1/1/2012/31/20	enter an account title to record the collection of lease payment	enter a debit amount	enter a credit amount
	enter an account title to record the collection of lease payment	enter a debit amount	enter a credit amount
	(Collection of lease payment.)
choose a transaction date 1/1/2012/31/20	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount