---### Example of Lease Agreement Journal Entries: Delray Leasing Company and Sheridan Company**Scenario Overview:**Delray Leasing Company signs an agreement on January 1, 2025, to lease equipment to Sheridan Company. The following details pertain to this agreement:- **Lease Payments:** Annual payments are $22,227.36.- **Fair Value of Asset (as of January 1, 2025):** $105,300.- **Expected Residual Value at Lease End:** $27,400 (un-guaranteed).- **Lease Term:** 4 years (non-cancellable).- **Economic Life of Equipment:** 6 years.- **Lessee Incremental Borrowing Rate:** 6%.- **Lessor Implicit Rate:** 5% (unknown to the lessee).- **Depreciation Method:** Straight-line for all equipment.### Detailed Breakdown:1. **Non-cancellable Lease Term:** 4 years, starting January 1, 2025. 2. **Fair Value of the Asset:** As of January 1, 2025, the asset’s value stands at $105,300.3. **Residual Value:** The asset is expected to have a residual value of $27,400 at the end of the lease, none of which is guaranteed.4. **Annual Lease Payments:** The agreement stipulates equal annual rental payments of $22,227.36, starting January 1, 2025.5. **Interest Rates:** - Lessee’s incremental borrowing rate is 6%. - Lessor's implicit interest rate is 5%, which remains unknown to the lessee.6. **Depreciation:** Sheridan uses the straight-line depreciation method for all equipment.### Journal Entries Example:Below is a table format for recording the lease and the first lease payment in the accounting records:| Date | Account Titles and Explanation | Debit | Credit ||------------|-------------------------------------------------|------------|-------------|| | (To record the lease) | | || 01/01/2025 | Lease Asset | [Amount] | || | Lease Liability | | [Amount] || | | | || 01/01/2025 | (To record the first lease payment) | | || 01/01/2025 | Lease Liability

A lease is a contract in which a landlord (the lessor) offers the tenant (the lessee) the right to…

Delray Leasing Company signs an agreement on January 1, 2025, to lease equipment to Sheridan Company. The following information relates to this agreement. Assume that the expected residual value at the end of the lease is $27,400, such that the payments are $22,227.36. 1. 2. 3. 4. The term of the non-cancelable lease is 4 years with no renewal option. The equipment has an estimated economic life of 6 years. The fair value of the asset at January 1, 2025, is $105,300. 6. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $27,400, none of which is guaranteed. The agreement requires equal annual rental payments of $22,227.36 to the lessor, beginning on January 1, 2025. 5. The lessee's incremental borrowing rate is 6%. The lessor's implicit rate is 5% and is unknown to the lessee. Sheridan uses the straight-line depreciation method for all equipment.

Delray Leasing Company signs an agreement on January 1, 2025, to lease equipment to Sheridan Company. The following information relates to this agreement. Assume that the expected residual value at the end of the lease is $27,400, such that the payments are $22,227.36. 1. 2. 3. 4. The term of the non-cancelable lease is 4 years with no renewal option. The equipment has an estimated economic life of 6 years. The fair value of the asset at January 1, 2025, is $105,300. 6. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $27,400, none of which is guaranteed. The agreement requires equal annual rental payments of $22,227.36 to the lessor, beginning on January 1, 2025. 5. The lessee's incremental borrowing rate is 6%. The lessor's implicit rate is 5% and is unknown to the lessee. Sheridan uses the straight-line depreciation method for all equipment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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