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 noncancelable, becomes effective on January 1, 2014, and requires annual rental payments of $417,972 each January 1, starting January 1, 2014. Winstons incremental borrowing rate is 12%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $2,594,000. 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.

Prepare the journal entry or entries to record the transaction on January 1, 2014 on the books of Winston Industries,

Prepare the journal entry or entries to record the transaction on January 1, 2014 on the books of Ewing Inc.

Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2014.

Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2014. (Prepare a lease amortization schedule for 2 years).

Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2014 for both the lessee and the lessor.

TABLE 6-5 PRESENT VALUE OF AN ANNUITY DUE OF 1 11% 12% 15% 2.73554 90909 2.71252 3.40183 3.85498 1.91743 2.75911 2.62571 3.57710 4.31213 3.44371 4.10245 4.23972 4.88965 5.48592 4.60478 5.11141 4.79079 5.35526 5.71220 5.967645.77158 4.35216 6.03295 6.14612 5.48732 6.74684 7.24689 6.75902 7.41766 7.80519 8.16073 6.01877 6.88923 6.937706.42062 7.71008 8.13896 7.81369 8.10336 8.36600 7.74987 7.19437 23371 8.60608 8.82371 9.02155 7.49506 .49236 42355 2448 7.62817 8.19087 8.37916 8.54879 8.70162 7.81086 7.97399 8.11963 8.24967 8.36578 6.84737 9.31256 10.12164 10.37189 7.04716 7.12797 9.75563 9.95012 41 20 2855 9.648699.17574.71843 743377 9.51356 .0750 8.64485 3884 9.88322175748.56200 725933 7.46415 7.51353 7.53351 10.82258 10.16095 9.54780 98442 .55088 10.81815 11.01680 11.20074 11.37108. 10.29224 9.77154 10.58021 9.98474 9.34814 25 11.67478 9.42174 8.84314 28 10.92897 10.23722 11.93518 12.05108 12.15841 9.80162 9.85011 9.69379 11.27365 10.47901 9.768609.13535 7.60910 29 30 11.1 11613 9.02181 9.05518 31 12.34980 12.43500 12.51389 12.58693 10.56943 11.51784 35 10.608589.800549.11159 7.57911 9.82932813635 7.61661 15682 10.67651 9.8993 922099 7.63805 12 12.71719 12.77518 9.19241 9.20751 9.87859 7.62314 7.63375 12.87858 11.72552 10.75697 9.93567