Problem 21-3

Monty Industries and Flounder Inc. enter into an agreement that requires Flounder Inc. to build three diesel-electric engines to Montys specifications. Upon completion of the engines, Monty 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 $443,873 each January 1, starting January 1, 2017.

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

(e) Prepare a lease amortization schedule for 2 years.

(f) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2017.

(g) 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.