Sweet Co. leases equipment to Pharoah Inc. on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 5 years with no renewal option, and the machinery has an estimated economic life of 6 years.
2.		The cost of the machinery is $740,000, and the fair value of the asset on January 1, 2020, is $1,140,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $76,000. Pharoah depreciates all of its 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 reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6.		Sweet desires a 10% rate of return on its investments. Pharoahs incremental borrowing rate is 10%. Sweets implicit rate is unknown to Pharoah.

Assume the accounting period ends on December 31.

(a)

Your answer is correct.

Determine the nature of this lease for both the lessee and the lessor.

Sweet Company		select a type of lease Finance LeaseSales-Type Lease
Pharoah Company		select a type of lease Finance LeaseSales-Type Lease

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(b)

Your answer is correct.

Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Annual Lease Payment

$enter the Annual Lease Payment in dollars

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(c)

Your answer is partially correct.

Prepare the journal entries Sweet would make in 2020 and 2021. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2020	enter an account title To record sales revenue on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record sales revenue on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record sales revenue on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record sales revenue on January 1 2020	enter a debit amount	enter a credit amount
	(To record sales revenue)
	enter an account title To record rental payment on January 1 2020	enter a debit amount	enter a credit amount
	enter an account title To record rental payment on January 1 2020	enter a debit amount	enter a credit amount
	(To record rental payment)
choose a transaction date Jan. 1, 2020Dec. 31, 2020Jan. 1, 2021Dec. 31, 2021	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
choose a transaction date Jan. 1, 2020Dec. 31, 2020Jan. 1, 2021Dec. 31, 2021	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
choose a transaction date Jan. 1, 2020Dec. 31, 2020Jan. 1, 2021Dec. 31, 2021	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

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(d)