Pharoah Incorporated leases a piece of machinery to Sheffield Company on January 1, 2020, under the following terms.

1.		The lease is to be for 4 years with rental payments of $16,394 to be made at the beginning of each year.
2.		The machinery has a fair value of $85,662, a book value of $63,920, and an economic life of 10 years.
3.		At the end of the lease term, both parties expect the machinery to have a residual value of $31,960. To protect against a large loss, Pharoah requests Sheffield to guarantee $22,720 of the residual value, which Irving agrees to do.
4.		The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5.		The implicit rate is 5%, which is known by Sheffield.
6.		Collectibility of the payments is probable.

Click here to view factor tables.

Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a operating leasefinance leasesales-type lease, and for the lessor, it is a sales-type leasefinance leaseoperating lease.

eTextbook and Media

List of Accounts

Prepare the journal entries for Sheffield for the year 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. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To records first lease payment)
Dec. 31
	(To record accrued interest)
Dec. 31
	(To record amortization expense)

eTextbook and Media

List of Accounts

Prepare the journal entries for Pharoah for the year 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. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1
	(To record lease)
Jan. 1
	(To record first lease payment)
Dec. 31
	(To record lease revenue)

Evaluate the criteria for classification of the lease, and describe the nature of the lease, assuming that Sheffield did not guarantee any amount of the expected residual value. For the lessee, it is a finance leaseoperating leasesales-type lease, and for the lessor, it is a sales-type leasefinance leaseoperating lease.