Problem 20-14
Sheridan Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2020. Annual rental payments of $48,000 are to be made at the beginning of each lease year (January 31). The insurance and repairs and maintenance costs are the lessees obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Sheridans incremental borrowing rate is 10%. Sheridan is unaware of the rate being used by the lessor. At the end of the lease, Sheridan has the option to buy the equipment for $3,200, which is considerably below its estimated fair value at that time. The equipment has an estimated useful life of seven years with no residual value. Sheridan uses straight-line depreciation on similar equipment that it owns, and follows IFRS 16.
Using time value of money tables, a financial calculator, or Excel functions, calculate the PV of the lease obligation. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)
Prepare the lease amortization schedule for the lease. (Hint: You may find the ROUND formula helpful for rounding in Excel.) (Round answers to 0 decimal places, e.g. 5,275.)
Sheridan Steel Corporation (Lessee)
Lease Amortization Schedule
(Annuity Due Basis)
Date		Annual		Interest		Reduction		Balance
		Lease		on Unpaid		of Lease		of Lease
		Payment		Liability		Liability		Liability
Prepare the journal entry that should be recorded on January 31, 2020, by Sheridan.
Jan. 31, 2020 (To record inception of lease and first lease payment.)
Prepare any necessary adjusting journal entries at December 31, 2020, and the journal entry or entries that should be recorded on January 31, 2021, by Sheridan. Sheridan does not use reversing entries.
Dec. 31, 2020 (To record depreciation expense.) ,(To record interest.)
Jan. 31, 2021 (To record lease payment.)
During year (To record payment of insurance and repairs.)
Prepare any necessary adjusting journal entries at December 31, 2021, and the journal entry or entries that should be recorded on January 31, 2022, by Sheridan.
	(To record depreciation expense.)
	(To record interest.)
	(To record lease payment.)
What amounts would appear on Sheridans December 31, 2021 SFP relative to the lease arrangement?