Sheridan Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement:

1.The term of the noncancelable lease is 4 years, with no renewal option. Payments of $855,442 are due on July 1 of each year.

2.The fair value of the equipment on July 1, 2021 is $3,060,000. The equipment has an economic life of 6 years with no salvage value.

3.Sheridan depreciates similar machinery it owns on the sum-of-the-years'-digits basis.

4.The lessee pays all executory costs.

5.Sheridan's incremental borrowing rate is 9% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments.

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(a)

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Indicate the type of lease Sheridan Company has entered into and what accounting treatment is applicable.

Capital Lease Method

Sheridan Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years, with no renewal option. Payments of $855,442 are due on July 1 of each year. The fair value of the equipment on July 1, 2021 is $3,060,000. The equipment has an economic life of 6 years with no salvage value. Sheridan depreciates similar machinery it owns on the sum-of-the-years'-digits basis. 4. The lessee pays all executory costs. Sheridan's incremental borrowing rate is 9% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments. Click here to view factor tables. 1. 2. 3. 5. (a) ZYour answer has been saved and sent for grading. See Gradebook for score details. Indicate the type of lease Sheridan Company has entered into and what accounting treatment is applicable. Capital Lease Method Click if you would like to Show Work for this question: Open Show Work SHOWIST OF ACCONTE Prepare the journal entries on Sheridan's books that relate to the lease agreement for the following dates: (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,250.) 1. July 1, 2021. 2. December 31, 2021. 3. July 1, 2022. 4. December 31, 2022 Date Account Titles and Explanation Debit Credit July 1, 2021 To record amortization) (To record interest payment.) (To record amortization) (To record interest payment.)