| Problem 21-06 (Part Level Submission) Wildhorse Leasing Company agrees to lease equipment to Sheffield Corporation on January 1, 2020. The following information relates to the lease agreement. | 1. | | The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. | | 2. | | The cost of the machinery is $514,000, and the fair value of the asset on January 1, 2020, is $677,000. | | 3. | | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Sheffield estimates that the expected residual value at the end of the lease term will be 55,000. Sheffield amortizes all of its leased equipment on a straight-line basis. | | 4. | | The lease agreement requires equal annual rental payments, beginning on January 1, 2020. | | 5. | | The collectibility of the lease payments is probable. | | 6. | | Wildhorse desires a 10% rate of return on its investments. Sheffields incremental borrowing rate is 11%, and the lessors implicit rate is unknown. | (Assume the accounting period ends on December 31.) Click here to view factor tables. |
