Sheffield Corporation agrees on January 1, 2020, to lease equipment from Packers, Inc. for 3 years. The lease calls for annual lease payments of $10,500 at the beginning of each year. The lease does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. In addition, the economic life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare Sheffield’ journal entries on January 1, 2020 (commencement of the operating lease), and on December 31, 2020. Assume the implicit rate used by the lessor is 9%, and this is known to Sheffield. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to "0" decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)
18.
Sheffield Corporation agrees on January 1, 2020, to lease equipment from Packers, Inc. for 3 years. The lease calls for annual lease payments of $10,500 at the beginning of each year. The lease does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. In addition, the economic life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment.
Prepare Sheffield’
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Date
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Account Titles and Explanation
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Debit
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Credit
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| (To record lease liability) | |||
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| (To record lease payment) | |||
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The question is based on the concept of Operating Lease in Lease Accounting.
Operating lease does not cover the major part of the economic life of the asset. On completion of the lease term the leased asset reverts back to Lessor.
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