Question

Shamrock Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2017. Annual rental payments of $56,000 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 6%; Shamrock’s incremental borrowing rate is 8%. Shamrock is unaware of the rate being used by the lessor. At the end of the lease, Shamrock 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. Shamrock uses the straight-line method of depreciation on similar owned equipment.

a.)Prepare the journal entries, that Shamrock should record on December 31, 2017.

- record eased asset and related liability and record the first rental payment.)

B.)Prepare the journal entries, that Shamrock should record on December 31, 2018.

- record amortization and record annual payment on lease liability.

C.) Prepare the journal entries, that Shamrock should record on December 31, 2019.

- Record annual amortization on leased assets and record annual payment on lease liability

D.) What amounts would appear on Shamrock’s December 31, 2019, balance sheet relative to the lease arrangement?

- ( the answer under the asset part is not Property, Plant and Equipment and leased equipment)

Answer 1