Question
Blue Industries and Kingbird Inc. enter into an agreement that requires Kingbird Inc. to build three diesel-electric engines to Blues specifications. Upon completion of the
Blue Industries and Kingbird Inc. enter into an agreement that requires Kingbird Inc. to build three diesel-electric engines to Blues specifications. Upon completion of the engines, Blue has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $414,625 each January 1, starting January 1, 2020. Blues incremental borrowing rate is 8%. The implicit interest rate used by Kingbird and known to Blue is 7%. The total cost of building the three engines is $2,743,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Blue depreciates similar equipment on a straight-line basis. At the end of the lease, Blue assumes title to the engines. Collectibility of the lease payments is probable.
Prepare the journal entries for both the lessee and lessor to record any entries needed in connection with the lease at December 31, 2020.
List of Accounts:
Accounts Payable Accumulated Depreciation-Buildings Accumulated Depreciation-Leased Buildings Accumulated Depreciation-Capital Leases Accumulated Depreciation-Equipment Accumulated Depreciation-Leased Equipment Accumulated Depreciation-Leased Machinery Accumulated Depreciation-Machinery Accumulated Depreciation-Right-of-Use Asset Advertising Expense Amortization Expense Airplanes Buildings Cash Cost of Goods Sold Deferred Gross Profit Deposit Liability Depreciation Expense Equipment Executory Costs Executory Costs Payable Gain on Disposal of Equipment Gain on Disposal of Plant Assets Gain on Lease Gain on Sale of Buildings Insurance Expense Interest Expense Interest Payable Interest Receivable Interest Revenue Inventory Land Leased Asset Leased Buildings Leased Equipment Lease Expense Leased Land Lease Liability Lease Receivable Lease Revenue Legal Expense Loss on Capital Lease Machinery Maintenance and Repairs Expense Notes Payable Prepaid Lease Executory Costs Prepaid Legal Fees Property Tax Expense Property Tax Payable Rent Expense Rent Payable Rent Receivable Rent Revenue Revenue from Sale-Leaseback Right-of-Use Asset Salaries and Wages Expense Sales Revenue Selling Expenses Trucks Unearned Profit on Sale-Leaseback Unearned Lease Revenue Unearned Service Revenue
Prepare the journal entries for both the lessee and lessor to record any entries needed in connection with the lease at December 31, 2020. when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter Of Debit Credit Account Titles and Explanation Lessee (December 31, 2020) (To record interest) (To record amortization) Lessor (December 31, 2020) Debit CreditStep by Step Solution
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