Problem 21-3

Concord Industries and Marigold Inc. enter into an agreement that requires Marigold Inc. to build three diesel-electric engines to Concords specifications. Upon completion of the engines, Concord 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 $461,027 each January 1, starting January 1, 2017. Concords incremental borrowing rate is 11%. The implicit interest rate used by Marigold Inc. and known to Concord is 9%. The total cost of building the three engines is $2,803,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Concord depreciates similar equipment on a straight-line basis. At the end of the lease, Concord assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

(b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Concord 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 0 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.)

(c) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Marigold 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 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)

(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 0 for the amounts.)

Prepare a lease amortization schedule for 2 years. (Round answers to 0 decimal places e.g. 58,971.)

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 0 for the amounts.)

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.