Intermediate Accounting III: CH 21

Problem 21-3 (Part Level Submission)

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston's specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 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 $450,657 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 10%. The total cost of building the three engines is $2,585,000. The economic life of the engines is estimated to be 10 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.

(b), (c) and (d)

	Your answer is partially correct. Try again.

(b)Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Winston Industries.(Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Account Titles and Explanation	Debit	Credit

(c)Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Ewing Inc.(Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 58,971.)

Account Titles and Explanation	Debit	Credit

Intermediate Accounting III: CH 21

Exercise 21-9 (Part Level Submission)

The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

Inception date:	May 1, 2014
Annual lease payment due at the beginning of
each year, beginning with May 1, 2014	$19,923.56
Bargain-purchase option price at end of lease term	$4,490.00
Lease term	5	years
Economic life of leased equipment	10	years
Lessors cost	$69,400.00
Fair value of asset at May 1, 2014	$84,400.00
Lessors implicit rate	11	%
Lessees incremental borrowing rate	11	%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

(a)

Compute the amount of the lease receivable at the inception of the lease.

b)

c)