Sheridan Manufacturing Ltd. has a signed lease agreement with LPN Leasing Inc. to lease some specialized manufacturing equipment.

The terms of the lease are as follows:

The lease is for 5 years commencing on January 1, 2020.

Sheridan must pay LPN $54,114 on January 1 of each year, beginning in 2020

Equipment of this type normally has an economic life of 8 years

LPN has concluded, based on its review of Sheridan's financial statements, that there is no unusual credit risk in this situation. LPN will not incur any further costs with regard to this lease.

Sheridan will pay all maintenance, insurance and taxes on the equipment to third parties

LPN purchases this equipment directly from the manufacturer at a cost of $196,825, and sells the equipment for $251,625.

Sheridan's borrowing rate is 7%, and LPN's implicit interest rate is 6%.

Both Sheridan and LPN follow ASPE, and both use straight-line depreciation for their assets.

Sheridan's fiscal year end is June 30

LPN's fiscal year end is December 31

1.How should Sheridan (lessee) classify this lease (operating; capital)? Show your calculations. Round all calculations to 2 decimal places. (3 marks)

Answer:

2.How should LPN (lessor) classify this lease (operating; capital - sales-type; capital - financing)? Show your calculations. Round all calculations to 2 decimal places. (2 marks)

Answer: