Sheridan Company leases a building to Skysong, Inc. on January 1, 2020. The following facts pertain to the lease agreement.1. The lease term is 5 years, with equal annual rental payments of $ 5,857 at the beginning of each year.2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.3. The building has a fair value of $ 29,000, a book value to Sheridan of $ 22,000, and a useful life of 6 years.4. At the end of the lease term, Sheridan and Skysong expect there to be an unguaranteed residual value of $ 5,500.5. Sheridan wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Skysong was unaware of the implicit rate used in the lease by Sheridan and has an incremental borrowing rate of 9%.Click here to view factor tables.How would Sheridan (lessor) and Skysong (lessee) classify this lease?Sheridan would classify the lease as a lease.Skysong would classify the lease as a lease.How would Sheridan initially measure the lease receivable, and how would Skysong initially measure the lease liability and right-of-use asset? (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.) SheridanLease receivable $ Present value of lease pay $ SkysongLease Liability/Right-of-Use Asset $

Sheridan would classify the lease as a Sale Type lease. Since Asset is not transferred at the end of the release term. Skysong would classify the lease as a Finance lease. Since the lease rental is more than 90% of the value of the asset.Sheridan Lease receivable $29,000 Present value of lease pay $25,256 Skysong Lease Liability/Right-of-Use Asset = $24,832Calculation of Present Value of lease pay - Sheridan = $5,857+ $ 5,857 * PVAF (8%,4years) =5857 + 5857 *3.31212 =$25,256 Calculation of Skysong Lease Liability/Right-of-Use Asset: = $5,857+ $ 5,857 * PVAF (9%,4years) =$5857 + 5857*3.23972 = $24,832

Answered: Sheridan Company leases a building to…

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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Sheridan Company leases a building to Skysong, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1.		The lease term is 5 years, with equal annual rental payments of $ 5,857 at the beginning of each year.
2.		Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3.		The building has a fair value of $ 29,000, a book value to Sheridan of $ 22,000, and a useful life of 6 years.
4.		At the end of the lease term, Sheridan and Skysong expect there to be an unguaranteed residual value of $ 5,500.
5.		Sheridan wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Skysong was unaware of the implicit rate used in the lease by Sheridan and has an incremental borrowing rate of 9%.

Click here to view factor tables.

How would Sheridan (lessor) and Skysong (lessee) classify this lease?

Sheridan would classify the lease as a lease.

Skysong would classify the lease as a lease.

How would Sheridan initially measure the lease receivable, and how would Skysong initially measure the lease liability and right-of-use asset? (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.)

		Sheridan
Lease receivable		$
Present value of lease pay		$

		Skysong
Lease Liability/Right-of-Use Asset		$

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