Problem 21-3 (Part Level Submission) Sarasota Industries and Ivanhoe Inc. enter into an agreement that requires Ivanhoe Inc. to build three diesel-electric engines to Sarasota's specifications. Upon completion of the engines, Sarasota 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 $419,681 each January 1, starting January 1, 2017. Sarasota's incremental borrowing rate is 9%. The implicit interest rate used by Ivanhoe Inc. and known to Sarasota is 7%. The total cost of building the three engines is $2,739,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Sarasota depreciates similar equipment on a straight-line basis. At the end of the lease Sarasota assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs. (b), (c) and (d) Your answer is partially correct. Try again (b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Sarasota 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 0 decimal places e.g. 58,971.) Account Titles and Explanation Credit Debit Leased Equipment 3695082 Lease Liability 3695082 (c) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Ivanhoe 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.) Account Titles and Explanation Debit Credit Lease Receivable 3695082 Cost of Goods Sold 2739000 Sales Revenue 3695082 Inventory 2739000 (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.) Account Titles and Explanation Lessee (January 1, 2017) Credit Debit Lease Liability 491681 Cash 491681 Lessor January 1, 2017) Debit Credit 491681 Cash Lease Receivable 491681 SHOW LIST OF ACCOUNTS
