Problem 21-3

Oriole Industries and Waterway Inc. enter into an agreement that requires Waterway Inc. to build three diesel-electric engines to Orioles specifications. Upon completion of the engines, Oriole 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 $421,974 each January 1, starting January 1, 2017. Orioles incremental borrowing rate is 10%. The implicit interest rate used by Waterway Inc. and known to Oriole is 8%. The total cost of building the three engines is $2,627,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Oriole depreciates similar equipment on a straight-line basis. At the end of the lease, Oriole 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

) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Oriole 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.)

) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Waterway 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.)

) 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.)