Question 1 Stellar Industries and Pearl Inc. enter into an agreement that requires Pearl Inc. to build three diesel-electric engines to Stellar's specifications. Upon completion of the engines, Stellar 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, 2020, and requires annual rental payments of $403,887 each January 1, starting January 1, 2020. Stellar's incremental borrowing rate is 8%. The implicit interest rate used by Pearl and known to Stellar is 6%. The total cost of building the three engines is $2,785,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Stellar depreciates similar equipment on a straight-line basis. At the end of the lease, Stellar assumes title to the engines. Collectibility of the lease payments is probable. Click here to view factor tables.