Problem 21-12 (Part Level Submission)

Metlock Industries and Bonita Inc. enter into an agreement that requires Bonita Inc. to build three diesel-electric engines to Metlocks specifications. Upon completion of the engines, Metlock 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 $400,939 each January 1, starting January 1, 2020. Metlocks incremental borrowing rate is 8%. The implicit interest rate used by Bonita and known to Metlock is 6%. The total cost of building the three engines is $2,693,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Metlock depreciates similar equipment on a straight-line basis. At the end of the lease, Metlock 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.

Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2020 for both the lessee and the lessor.