Sheffield Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $53,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Sheffield’s incremental borrowing rate is 9%. Sheffield is unaware of the rate being used by the lessor. At the end of the lease, Sheffield has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Sheffield uses the straight-line method of depreciation on similar owned equipment.
Sheffield Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $53,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Sheffield’s incremental borrowing rate is 9%. Sheffield is unaware of the rate being used by the lessor. At the end of the lease, Sheffield has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Sheffield uses the straight-line method of depreciation on similar owned equipment.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Sheffield Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $53,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Sheffield’s incremental borrowing rate is 9%. Sheffield is unaware of the rate being used by the lessor. At the end of the lease, Sheffield has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Sheffield uses the straight-line method of
Transcribed Image Text:Prepare the journal entries, that Sheffield should record on December 31, 2022. (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 O for the amounts.
Round answers to O decimal places e.g. 58,971.)
Date
Account Titles and Explanation
Debit
Credit
December
31, 2022
(To record annual amortization on leased assets.)
(To record annual payment on lease liability.)
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