Question

Problem 21A-12b (Part Level Submission) Orole Industries and Waterway Inc. enter into an agreement that requires Waterway Inc. to build three diesel electric engines to Orioles specifications. Upon completion of the engines, Orole has agreed to lease them for a period of 10 years and to assume all costs and risk of ownership. The lease is non-cancelable, becomes effective on January 1, 2017, and requires annual rental payments of $373,637 each January 1, starting January 1, 2017 Orole's incremental borrowing rate is . The implicit interest rate used by Waterway and known to Oroles 69. The total cost of building the three engines is $2,500,000. The economic Ide of the engines is estimated to be 10 years, with residual value set at rere Oriole depreciates sundar equipment on a straight line basis. At the end of the lease, Oriolle assumes title to the engines, Collectibility of the lease payments is probable Click here to view the factor table, (b), (c) and (d) (b) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Oriolle (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 amount titles and enter for the amount Round Value factor calculations te decimal places, e.g. 1.25124 and the final answer to decimal places 58,971.) Account Titles and Explanation Debit (c) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Waterway (the lessor). (Credit account titles are automatically indented when amount is entered. Da not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts. Round answers to decimal places.. SR,971.) Account Titles and Explanation Credit

Answer 1

Ans: C A B $373,637 7.3601G16% n-10)| S2,750,006| Particulars A) Present Value of Lease Payments Sales Less: Cost of goods sold Profit on sale $2,750,006 $2,500,000 $250,006 Q. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of "O" Industries. B) Date 1-Jan-14 Leased engines Accounts titile and explanation Debit Creidt $2,750,006 Lease liability (To record lease agrrement) $2,750,006 Q2. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of "W" Inc. Debit Accounts titile and explanation Account Title Lease receivable Cost of goods sold Sales Inventory Date Creidt Credit Debit C) Date $2,750,006 $2,500,000 $2,750,006 S2,500,000 Q3. Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017 Lessee Accounts titile and explanation Lease libility Cash (To record rental payment in cash) D Date Creidt Debit S373,637 $373,637 Lessor Accounts titile and explanation Cash Lease receivable (To record rental receipt) Date Debit Creidt $373,637 $373,637