On January 1, 2017, Sheridan Company leased equipment to Packer Corporation. The
ID: 2539554 • Letter: O
Question
On January 1, 2017, Sheridan Company leased equipment to Packer Corporation. The following information pertains to this lease.
Collectibility of lease payments by the lessor is probable.
Both the lessor and the lessee’s accounting periods end on December 31.
Discuss the nature of this lease to Sheridan and Packer.
The nature of this lease for Sheridan is a sales type or finance lease?
The nature of this lease for Packer is a sales type or finance lease?
Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.)
Prepare all the necessary journal entries for Sheridan for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease)
(To record lease payment)
12/31/17
Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease)
(To record the receipt of lease payment)
12/31/17
(To record amortization of the right-of-use asset)
(To record interest expense)
1. The term of the noncancelable lease is 5 years. At the end of the lease term, Packer has the option to purchase the equipment for $9,000, while the expected residual value at the end of the lease is $16,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2017. 3. The fair value of the equipment on January 1, 2017, is $230,000, and its cost is $178,000. 4. The equipment has an economic life of 6 years. Packer depreciates all of its equipment on a straight-line basis. 5. Sheridan set the annual rental to ensure a 7% rate of return. Packer’s incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown. 6.Collectibility of lease payments by the lessor is probable.
Both the lessor and the lessee’s accounting periods end on December 31.
Discuss the nature of this lease to Sheridan and Packer.
The nature of this lease for Sheridan is a sales type or finance lease?
The nature of this lease for Packer is a sales type or finance lease?
Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.)
Prepare all the necessary journal entries for Sheridan for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease)
(To record lease payment)
12/31/17
Prepare all the necessary journal entries for Packer for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
(To record the lease)
(To record the receipt of lease payment)
12/31/17
(To record amortization of the right-of-use asset)
(To record interest expense)
Explanation / Answer
The nature of Lease is a finance lease for Lesse and Lesser.
Computation of Annual Lease Rent Fair Value of Lease Asset-( Residual Value* PV @ ) $230,000 Cumm PVAF @ 7% for 0-5 Year 5.10019 Residual Value at the end of 6 year (a) $16,000 PVF @7% at the end of 6 Year (b) 0.66634 PV of Residual Value (a*b) $10,661 Annual Lease rent= (Fair Value of Leased Asset -PV of Residula value)/Cumm PVAF for 0-5 Year = ($230000-$10661)/5.10019 Annual Lease rent= $43006 Journal Entry in the books of Sheridan Company for 2017 Date Account & Explanation Debit Credit 01/01/2017 Lease Receivable $230,000.00 Cost of Goods Sold ( $178000-10661) $167,339.00 Sales ( $43006*5.1009) ( Rounded off) $219,339.00 Inventory $178,000.00 Cash $43,006.00 Lease Receivable $43,006.00 ( Lease rent Payment received) 31/12/2017 Interest Receivable $13,089.60 Interest Revenue $13,089.60 ( $230000-$43006)*7% Lease Receivable $29,916.40 Interest Receivable $13,089.60 Cash $43,006.00 Being Lease Rent and Interest received) Journal Entry in the books of Packer Incorporation for 2017 Date Account & Explanation Debit Credit 01/01/2017 Leases Asset $214,716.00 Lease Liability $214,716.00 Being Cumm Annual Lease rent recorded for 0-5 year @ 8%,( $43006*4.99271) Lease Libility $43,006.00 Cash $43,006.00 Being Lease rent paid for 1st Year 31/12/2017 Deprecation Expense $35,786.00 Accumulated Depreciation $35,786.00 Being Depreciation expense booked, ( $214716/6 year) Interest Expense $17,171.00 Interest Payable $17,171.00 Being Interest expence booked, ( $214716-$43006)*10% Lease Libility $25,835.00 Interest Payable $17,171.00 Cash $43,006.00 Being Lease Liability & Interest paid
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