Question

On January 1, 2021, Sheridan Corporation signed a 10-year noncancelable lease for certain machinery. The terms of the lease called for Sheridan to make annual payments of $245000 at the end of each year for 10 years with the title passing to Sheridan at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Sheridan uses the straight-line method of depreciation for all of its fixed assets. Sheridan accordingly accounted for this lease transaction as a financial lease. The lease payments were determined to have a present value of $1643970 at an effective interest rate of 8%. With respect to this lease, Sheridan should record for 2021:

Answer 1

Answer:

With respect to the lease, Sheridan should record for 2021: interest expense is $1315176 and the depreciation expenses is 109589

Explanation:

Solution

Given that:

The Present value of lease transaction = $1643970

The useful life estimated is = 15 years

Interest rate = 8%

The interest expenses is = $1643970 *8 = 1,315176

The Depreciation expenses = $1643970 / 15 yrs = 109,598

Therefore, the interest expense is $1315176 and the depreciation expenses is 109589