Problem 21-3 Cheyenne Industries and Ayayai Inc. enter into an agreement that requires Ayayai Inc. to build three diesel-electric engines to Cheyenne's specifications. Upon completion of the engines, Cheyenne 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, 2017, and requires annual rental payments of $445,159 each January 1, starting January 1, 2017. Cheyenne's incremental borrowing rate is 10%. The implicit interest rate used by Ayayai Inc. and known to Cheyenne is 9%. The total cost of building the three engines is $2,713,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Cheyenne depreciates similar equipment on a straight-line basis. At the end of the lease, Cheyenne assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs. Click here to view factor tables (b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Cheyenne Industries. (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 O 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, 2017, on the books of Ayayai Inc. (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 O decimal places e.g. 58,971.) Account Titles and Explanation Debit Credit (d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017. (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.) Debit Credit Account Titles and Explanation Lessee (January 1, 2017) Lessor (January 1, 2017) Debit Credit SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Prepare a lease amortization schedule for 2 years. (Round answers to o decimal places e.g. 58,971.) CHEYENNE INDUSTRIES Lease Amortization Schedule Annual Lease Interest on Reduction in Lease Receipt/Payment Receivable/Liability Receivable/Liability Receivable/ Liability Date 1/1/17 1/1/17 1/1/18 1/1/19 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2017. (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.) Debit Credit Account Titles and Explanation Lessee (December 31, 2017) Lessor (December 31, 2017) Debit Credit SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2017, for both the lessee and the lessor. CHEYENNE INDUSTRIES Balance Sheet (Partial) Asset Current Liability AYAYAI INC Balance Sheet (Partial) Assets SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT
