Windsor Industries and Sheridan Inc. enter into an agreement that requires Sheridan Inc. to build three diesel-electric engines to Windsor's specifications. Upon completion of the engines, Windsor has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $384,019 each January 1, starting January 1, 2020. Windsor's incremental borrowing rate is 8%. The implicit interest rate used by Sheridan and known to Windsor is 6%. The total cost of building the three engines is $2,584,000. The economic life of the engines is estimated to be 10 years with residual value set at zero. Windsor depreciates similar equipment on a straight-line basis. At the end of the lease, Windsor assumes title to the engines. Collectibility of the lease payments is probable. Click here to view factor tables. Prepare the journal entries for both the lessee and lessor to record any entries needed in connection with the lease at December 31, 2020. (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 for the amounts.) Debit Credit Account Titles and Explanation Lessee (December 31, 2020) Interest Expense 146,544 Interest Payable 146,544 (To record interest) Depreciation Expense 258,400 Accumulated Depreciation Equipment 258,400 (To record amortization) Lessor (December 31, 2020) Debit Credit Interest Receivable 146,544 Interest Revenue 146,544 Your answer is partially correct. Prepare a lease amortization schedule for 2 years. (Round answers to decimal places e.g. 58,971.) WINDSOR INDUSTRIES/SHERIDAN INCORPORATED Lease Amortization Schedule Annual Lease Receipt/Payment Interest on Receivable/Liability Reduction in Receivable/Liability Lease Receivable/ Liability TA 0 0 $ 0 2,995,997 384,019 0 384,019 2,611.978 384,019 156,719 227,300 2,384,678 384,019 143,081 240,938 2,143,740 Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2020, for both the lessee and the lessor. WINDSOR INDUSTRIES Balance Sheet (Partial) December 31, 2020 Asset Property. Plant and Equipment Leased Equipment $ 2,826,418 Current Liability Current Liabilities Interest Payable $ 146,544 Long-term Liabilities Lease Liability 237,475 SHERIDAN INC. Balance Sheet (Partial) December 31, 2020 Assets Current Assets Interest Receivable $ 146,000 Non-current Assets Lease Receivable $ $ 237,475 Assume that Windsor incurs legal fees related to the execution of the lease of $30,000. In addition, assume Windsor receives a lease incentive from Sheridan of $50,000 to enter the lease. How will this affect your answer to part b? Account Titles and Explanation Debit Credit Right-of-Use Asset 2,806,418 Lease Liability 2,776,418 Cash 30,000
