Problem 21A-12 b-g (Part Level Submission) Splish Industries and Blossom Inc. enter into an agreement that requires Blossom Inc. to build three diesel-electric engines to Splish's specifications. Upon completion of the engines, Splish has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2017, and requires annual rental payments of $385,173 each January 1, starting January 1, 2017. Splish's incremental borrowing rate is 8%. The implicit interest rate used by Blossom and known to Splish is 6%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Splish depreciates similar equipment on a straight-line basis. At the end of the lease, Splish assumes title to the engines. Collectibility of the lease payments is probable. Click here to view the factor table. (b), (c) and (d) Your answer is correct. (b) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Splish (the lessee). (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 Debit Credit Right-of-Use Asset 3005000 Lease Liability 3005000 (C) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Blossom (the lessor). (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 answers to O decimal places e.g. 58,971.) Account Titles and Explanation Debit Credit Lease Receivable cost of Goods Sold - | Sales Revenue 3005000 - Inventory 2600000 (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 o for the amounts.) Debit Credit Account Titles and Explanation Lessee (January 1, 2017) Lease Liability cash Lessor (January 1, 2017) cash T T 3851731 T Debit 385173 | 385173 Credit T Lease Receivable 385173 Click if you would like to Show Work for this question: Open Show Work (el) Prepare a lease amortization schedule for 2 years. (Round answers to o decimal places e.g. 58,971.) SPLISH INDUSTRIES BLOSSOM INCORPORATED Lease Amortization Schedule Annual Lease Interest on Reduction in Lease Date Receipt/Payment Receivable/Liability Receivable/Liability Receivable/ Liability 1/1/17 1/1/17 1/1/18 1/1/19 Click if you would like to Show Work for this question: Open Show Work Problem 21A-12 b-g (Part Level Submission) Splish Industries and Blossom Inc. enter into an agreement that requires Blossom Inc. to build three diesel-electric engines to Splish's specifications. Upon completion of the engines, Splish has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2017, and requires annual rental payments of $385,173 each January 1, starting January 1, 2017. Splish's incremental borrowing rate is 8%. The implicit interest rate used by Blossom and known to Splish is 6%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Splish depreciates similar equipment on a straight-line basis. At the end of the lease, Splish assumes title to the engines. Collectibility of the lease payments is probable. Click here to view the factor table. (b), (c) and (d) Your answer is correct. (b) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Splish (the lessee). (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 Debit Credit Right-of-Use Asset 3005000 Lease Liability 3005000 (C) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Blossom (the lessor). (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 answers to O decimal places e.g. 58,971.) Account Titles and Explanation Debit Credit Lease Receivable cost of Goods Sold - | Sales Revenue 3005000 - Inventory 2600000 (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 o for the amounts.) Debit Credit Account Titles and Explanation Lessee (January 1, 2017) Lease Liability cash Lessor (January 1, 2017) cash T T 3851731 T Debit 385173 | 385173 Credit T Lease Receivable 385173 Click if you would like to Show Work for this question: Open Show Work (el) Prepare a lease amortization schedule for 2 years. (Round answers to o decimal places e.g. 58,971.) SPLISH INDUSTRIES BLOSSOM INCORPORATED Lease Amortization Schedule Annual Lease Interest on Reduction in Lease Date Receipt/Payment Receivable/Liability Receivable/Liability Receivable/ Liability 1/1/17 1/1/17 1/1/18 1/1/19 Click if you would like to Show Work for this question: Open Show Work
