Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Martinez Industries and Sandhill Inc. enter into an agreement that requires Sandhill Inc. to build three diesel-electric engines to Martinez's specifications. Upon completion of the
Martinez Industries and Sandhill Inc. enter into an agreement that requires Sandhill Inc. to build three diesel-electric engines to Martinez's specifications. Upon completion of the engines, Martinez 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 $405,443 each January 1, starting January 1, 2020. Martinez's incremental borrowing rate is 8%. The implicit interest rate used by Sandhill and known to Martinez is 7%. The total cost of building the three engines is $2,685,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Martinez depreciates similar equipment on a straight-line basis. At the end of the lease, Martinez assumes title to the engines. Collectibility of the lease payments is probable. (b) Prepare the journal entry to record the transaction on January 1, 2020, on the books of Martinez (the lessee). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. 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.) Debit Credit Account Titles and Explanation Right-of-Use Asset Lease Liability (c) Prepare the journal entry to record the transaction on January 1, 2020, on the books of Sandhill (the lessor). (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Round answers to decimal places e.g. 58,971.) Debit Credit Account Titles and Explanation Lease Receivable Cost of Goods Sold Sales Revenue Inventory (d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter Ofor the amounts.) Debit Credit Account Titles and Explanation Lessee (January 1, 2020) Lease Liability Cash Lessor (January 1, 2020) Debit Credit Cash Lease Receivable
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started