Problem 21-3
Indigo Industries and Sweet Inc. enter into an agreement that
requires Sweet Inc. to build three diesel-electric engines to
Indigo’s specifications. Upon completion of the engines, Indigo 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, 2017, and requires annual rental payments
of $403,580 each January 1, starting January 1, 2017.
Indigo’s incremental borrowing rate is 9%. The implicit interest
rate used by Sweet Inc. and known to Indigo is 7%. The total cost
of building the three engines is $2,637,000. The economic life of
the engines is estimated to be 10 years, with residual value set at
zero. Indigo depreciates similar equipment on a straight-line
basis. At the end of the lease, Indigo assumes title to the
engines. Collectibility of the lease payments is reasonably
certain; no uncertainties exist relative to unreimbursable lessor
costs.
(b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Indigo Industries. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
(c) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Sweet Inc. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.)
(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
(e) Prepare a lease amortization schedule for 2 years. (Round answers to 0 decimal places e.g. 58,971.)
Answer:
A | B | A*B | |
Present Value of Lease Payments | 4,03,580 | 7.51523 | 30,32,997 |
Sales | 30,32,997 | ||
Less: Cost of goods sold | 26,37,000 | ||
Profit on sale | 3,95,997 |
*Present value of an annuity due at 7% for 10 years. |
Qb. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Indigo Industries. | |||
Date | Account Title | Debit($) | Credit($) |
Leased Engines (Capital Lease) | 30,32,997 | ||
Lease lability | 30,32,997 | ||
(To record lease agrrement) | |||
Qc. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Sweet Inc. | |||
Date | Account Title | Debit($) | Credit($) |
Lease receivable | 30,32,997 | ||
Cost of goods sold | 26,37,000 | ||
Sales | 30,32,997 | ||
Inventory | 26,37,000 | ||
Qd. Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017. | |||
Lessee | |||
Date | Account Title | Debit($) | Credit($) |
Lease lability | 4,03,580 | ||
Cash | 4,03,580 | ||
(To record rental payment in cash) | |||
Lessor | |||
Date | Account Title | Debit($) | Credit($) |
Cash | 4,03,580 | ||
Lease receivable | 4,03,580 | ||
(To record rental receipt) |
e) | LEASE AMORTIZATION SCHEDULE: | ||||
Annual | Interest | Reduction | |||
Date | lease rent | 7% | Lease | ||
01-01-2017 | 30,32,997 | ||||
01-01-2017 | 4,03,580 | 0 | 4,03,580 | 26,29,417 | |
01-01-2018 | 4,03,580 | 184059.2 | 2,19,521 | 24,09,896 | |
01-01-2019 | 4,03,580 | 168692.7 | 2,34,887 | 21,75,008 |
Problem 21-3 Indigo Industries and Sweet Inc. enter into an agreement that requires Sweet Inc. to...
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