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 non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $384,532 each January 1, starting January 1, 2020. Winston's 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. Your answer is partially correct. Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor. The lease should be treated as a operating lease by Winston Industries. The lease should be treated as a sales-type lease by Ewing Inc. (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 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.) Debit Credit Account Titles and Explanation Leased Asset 3000000 Lease Liability 3000000 (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 for the amounts. Round answers to 0 decimal places e.g. 58,971.) Debit Credit Account Titles and Explanation Cost of Goods Sold 2600000 Lease Receivable 3000000 Sales Revenue 3000000 Inventory 2600000 (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 O for the amounts.) Debit Credit Account Titles and Explanation Lessee (January 1, 2020) Cash 384532 Lease Receivable 384532 Lessor (January 1, 2020) Debit Credit Lease Liability 384532 Cash 384532 Your answer is partially correct. Prepare a lease amortization schedule for 2 years. (Round answers to decimal places eg. 58,971.) WINSTON INDUSTRIES/EWING INCORPORATED Lease Amortization Schedule Interest on Reduction in Receivable/Liability Receivable/Liability Annual Lease Receipt/Payment Lease Receivable/ Liability $ $ 384532 LA 0 $ 384532 $ 384532 384532 21765.96 362766 362766.04 384532 42299.89 342232.1 3422860.42 384532 61671.52 322860.5 304585.36 Prepare the journal entries for both the lessee and lessor to record any entries needed in connection with the lease at December 31, 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 O for the amounts.) Debit Credit Account Titles and Explanation Lessee (December 31, 2020) (To record interest) (To record amortization) Lessor (December 31, 2020) Debit Credit Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2020, for both the lessee and the lessor. WINSTON INDUSTRIES Balance Sheet (Partial) December 31, 2020 Asset Current Liability $ EWING INC. Balance Sheet (Partial) December 31, 2020 Assets $ $ Assume that Winston incurs legal fees related to the execution of the lease of $30,000. In addition, assume Winston receives a lease incentive from Ewing of $50,000 to enter the lease. How will this affect your answer to part b? Account Titles and Explanation Debit Credit