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Winston Industries and Ewing SA enter into an agreement that requires Ewing to build three diesel-electric engines to Winston's specifications. Upon completion of the engines, Winston has agreed to rent 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, 2019, and requiresannual rental payments of €384,532 each January 1, starting January 1, 2019.
Winston's incremental borrowing rate is 8%. The implicit interest rate used by Ewing and known to Winston is 6%. The market value of the three engines is €3,000,000 at total at the lease commencement. 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
Present value of an annuity-due of $1 at 6% for 10 years is 7.80169.
Present value of an annuity-due of $1 at 8% for 10 years is 7.24689.
Instructions
a. Discuss the nature of this lease transaction from the viewpoint of the lessor.
b. Prepare the
c. Prepare the journal entry or entries to record the commencement of the lease on January 1, 2019, on the books of Ewing.
d. Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2019.
e. Prepare the journal entries for both the lessee and lessor to record any entries needed inconnection with the lease at December 31, 2019. (Prepare a lease amortization schedule for 2years.)
f. Show the items and amounts that would be reported on the
g. Assume that Winston incurs legal fees related to the execution of the lease of €30,000. Inaddition, assume Winston receives a lease incentive from Ewing of €50,000 to enter the lease.How will this affect your answer to (b)?
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