Problem 21-3 (Part Level Submission) Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston's specifications. Upon completion of the engines, Winston 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, 2014, and requires annual rental payments of $450,361 each January 1, starting January 1, 2014 3 Winston's incremental borrowing rate is 12% The implicit interest rate used by Ewing Inc. and known to winston is 10% The total cost of building the three engines is $2,544,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs TABLE C-5 PRESENT VALUE OF AN ANNUITY DUE OF 1 .90909 2.73554 2.78326 3.67710 2.75911 289005 .10245 499271 562288 6 20037 6.74864 7 24089 479079 5.35520 506842 833493 675902 4 60478 5.4850 6.03296 6.53482 35210 4 78448 518042 556376 5.96764 6.14812 5.77158 7.71008 7.14457 7.40500 7.41700 23371 8 53608 8 90378 8 10073 8.48090 7.19437 42355 7.62017 8 10336 7.98187 6.72448 8.19067 T81066 6.84737 10.12104 103769 10 60300 975583 9.95012 836678 7.19823