Reference no: EM132740375
Question - On January 1, 2020, Sheridan Ltd. entered into an agreement to lease a truck from Concord Ltd. Both Sheridan and Concord use IFRS 16. The details of the agreement are as follows:
Carrying value of truck for Concord Ltd. $20,008
Fair value of truck $20,008
Economic life of truck 5 years
Lease term3 years
Rental payments (at beginning of each month) $600
Executory costs included in rental payments each month for insurance $25
Incremental borrowing rate for Sheridan Ltd. 12%
Sheridan Ltd. expects to pay Concord Ltd. $3,610 under a residual value guarantee for the truck.
Additional information:
1. There are no abnormal risks associated with the collection of lease payments from Sheridan.
2. There are no additional unreimbursable costs to be incurred by Concord in connection with the leased truck.
3. At the end of the lease term, Concord sold the truck to a third party for $3,340, which was the truck's fair value at December 31, 2022. Sheridan paid Concord the difference between the guaranteed residual value of $3,610 and the proceeds obtained on the resale.
4. Sheridan knows the interest rate that is implicit in the lease.
5. Sheridan knows the amount of executory costs included in the minimum lease payments.
6. Sheridan uses straight-line depreciation for its trucks with the residual value guarantee of $3,610 for the leased truck.
Required - Prepare the journal entries that Concord would make on January 1, 2020, and the adjusting journal entries at December 31, 2020, to record the annual interest income from the lease arrangement, assuming that Concord has a December 31 fiscal year end.
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