Prepare the journal entries for both the lessee and lessor

Reference no: EM13485487

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. ton build three diesel-electric engines to Winston's specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 8 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2014, and requires annual rental payments of $84,591 each January 1, starting January 1, 2014.

Winston's incremental borrowing rate is 12%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $450,000.

The economic life of the engines is estimated to be 8 years, with residual value set at zero.

Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Instructions

a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor.

b) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Winston Industries.

c) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Ewing Inc.

d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2014.

e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2014. (Prepare a lease amortization schedule for 2 years.)

f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2014, for both the lessee and the lessor.

Reference no: EM13485487

Questions Cloud

If there is no basis risk the minimum variance hedge ratio : if there is no basis risk the minimum variance hedge ratio is always 1.0. is this statement true? explain your

For an asset where futures prices are usually less than : for an asset where futures prices are usually less than spot prices long hedges are likely to be particularly

Does a perfect hedge always succeed in locking in the : does a perfect hedge always succeed in locking in the current spot price of an asset for a future transaction? explain

Calculate the originally reported earnings per share for : for several years orbon inc. has followed a policy of paying a cash dividend of 0.58 per share and having a 8 stock

Prepare the journal entries for both the lessee and lessor : winston industries and ewing inc. enter into an agreement that requires ewing inc. ton build three diesel-electric

Firms often involve themselves in projects that do not : firms often involve themselves in projects that do not result directly in profits. do these projects contradict the

March may july september and december state the contract : in the chicago board of trades corn futures contract the following delivery months are available march may july

Assume that flip uses a periodic inventory system and that : the following information is available for flip companybeginning

Do the strategic benefits of stimulus generalization : 1. do the strategic benefits of stimulus generalization outweigh its possible disadvantages in strategic marketing?

User Account

All Pages