Sheridan Manufacturing Ltd

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has signed a lease agreement with Sunland Leasing Inc. to lease some specialized manufacturing equipment. The terms of the lease are as follows:

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The lease is for

$5$

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years commencing January

$1$

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$2023$

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Sheridan must pay Sunland $

$54$

$,$

$114$

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on January

$1$

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of each year, beginning in

$2023$

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Equipment of this type normally has an economic life of

$6$

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years

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Sunland has concluded, based of its review of Sheridan's financial statements, that there is no unusual credit risk in this

situation. Sunland will not incur any further costs with regard to this lease.

Sunland purchases this equipment directly from the manufacturer at a cost of $

$199$

$,$

$626$

$,$

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and normally sells the equipment for $

$251$

$,$

$626$

$.$

Sheridan's borrowing rate is

$7$

$\%$

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Sunland

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s implied interest rate is

$6$

$\%$

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which is known to Sheridan at the time of negotiating the lease.

Sheridan uses the straight

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line method to depreciate similar equipment.

Both Sheridan and Sunland have calendar fiscal years

$($

year end December

$31)$

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and follow ASPE.From Sheridan Manufacturing's perspective, is this a capital or operating lease?

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Capital Lease

prepare journal entries on sunland leasing's books on jan$1,2023$