Question

On January 1, 2017, Sheffield Company contracts to lease equipment for 5 years, agreeing to make a payment of $109,913 at the beginning of each year, starting January 1, 2017. The leased equipment is to be capitalized at $466,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Sheffield’s incremental borrowing rate is 6%, and the implicit rate in the lease is 9%, which is known by Sheffield. Title to the equipment transfers to Sheffield at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

What amounts will appear on the lessee’s December 31, 2017, balance sheet relative to the lease contract?

SHEFFIELD COMPANY Balance Sheet (Partial) December 31, 2017 Assets Noncurrent Assets Right-of-Use Asset 279600 Liabilities Noncurrent Liabilities Lease Liability Current Liabilities Interest Expense

Answer 1

	SHEFFIELD COMPANY
	Balance Sheet (Partial)
	December 31, 2017
	Assets
	Non current Assets
	Leased Equipment, Net	$279,600
	Liabilities
	Current Liabilities
	Lease Liability	$77,865
	Non-Current Liabilities
	Lease Liability	$278,222
	Working
	Leased Equipment	$466,000
	Less: Depreciation	$186,400
	($466,000 x 40%)
	Leased Equipment, net	$279,600
Date	Annual Lease Payment	Int. on Liability (9%)	Reduction of LL	Lease Liability (LL)
01-01-2017				$466,000
01-01-2017	$109,913	$0	$109,913	$356,087
01-01-2018	$109,913	$32,048	$77,865	$278,222
01-01-2019	$109,913	$25,040	$84,873	$193,349
01-01-2020	$109,913	$17,401	$92,512	$100,837
01-01-2021	$109,913	$9,075	$100,838	$0