Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winstons 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 non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $384,532 each January 1, starting January 1, 2020. Winstons incremental borrowing rate is 8%. The implicit interest rate used by Ewing and known to Winston 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. 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 probable. Click here to view factor tables.

(a)

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Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor. The lease should be treated as a sales-type leasefinance leaseoperating lease by Winston Industries. The lease should be treated as a sales-type leaseoperating leasefinance lease by Ewing Inc.

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(b), (c) and (d)

(b) Prepare the journal entry to record the transaction on January 1, 2020, on the books of Winston (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 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.)

Account Titles and Explanation	Debit	Credit

(c) Prepare the journal entry to record the transaction on January 1, 2020, on the books of Ewing (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 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)

Account Titles and Explanation	Debit	Credit

(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2020. (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	Debit	Credit
Lessee (January 1, 2020)
Lessor (January 1, 2020)	Debit	Credit

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