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Problem 20-5

Sheffield Manufacturing Ltd. agrees to lease equipment to Bridgeport Lte. on July 15, 2020. Sheffield follows ASPE and Bridgeport is a public company following IFRS 16. The following information relates to the lease agreement.

1.		The lease term is seven years, with no renewal option, and the equipment has an estimated economic life of nine years.
2.		The equipments cost is $433,000 and the assets fair value on July 15, 2020, is $582,200.
3.		At the end of the lease term, a payment to Sheffield, the lessor, in the amount of $90,000 is expected to be payable by Bridgeport, the lessee, under a residual value guarantee. Bridgeport depreciates all of its equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments beginning on July 15, 2020.
5.		Sheffield usually sells its equipment to customers who buy the product outright, but Bridgeport was unable to get acceptable financing for a cash purchase. Sheffields credit investigation on Bridgeport revealed that the companys financial situation was deteriorating. Because Bridgeport had been a good customer many years ago, Sheffield agreed to enter into this lease agreement, but used a higher-than-usual 14% interest rate in setting the lease payments. Bridgeport is aware of this rate.
6.		Sheffield is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Bridgeport has agreed to pay all executory costs directly to third parties.
7.		Sheffield incurred legal costs of $2,500 in early July 2020 in finalizing the lease agreement.

Identify the nature of this lease for both the lessee and the lessor.

		The nature of the lease
Bridgeport Lte.		A capital leaseA right-of-use asset
Sheffield Manufacturing Ltd.		An operating leaseA capital lease

Using time value of money tables, a financial calculator, or Excel functions, calculate the amount of the annual rental payment that is required to obtain a return of 14% for Sheffield. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Prepare the journal entries that Bridgeport would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year end and that it does not use reversing entries. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
July 15, 2020
Dec. 31, 2020
	(To record depreciation expense.)
Dec. 31, 2020
	(To record interest.)
July 15, 2021
	(To record lease payment.)
Dec. 31, 2021
	(To record depreciation expense.)
Dec. 31, 2021
	(To record interest.)

Annual rental payment

$

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