Question

Whispering Industries and Metlock Inc. enter into an agreement that requires Metlock Inc. to build three diesel-electric engines to Whispering’s specifications. Upon completion of the engines, Whispering 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, 2017, and requires annual rental payments of $397,478 each January 1, starting January 1, 2017. Whispering’s incremental borrowing rate is 8%. The implicit interest rate used by Metlock and known to Whispering is 6%. The total cost of building the three engines is $2,700,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Whispering depreciates similar equipment on a straight-line basis. At the end of the lease, Whispering 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 Whispering (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 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.) Account Titles and Explanation Debit Credit (c) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Metlock (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 0 for the amounts. Round answers to 0 decimal places e.g. 58,971.) Account Titles and Explanation Debit Credit (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.) Account Titles and Explanation Debit Credit Lessee (January 1, 2017) Lessor (January 1, 2017) Debit Credit Click if you would like to Show Work for this question: Open Show Work SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

Answer 1

Answer (b) prepare the Journal entry to record the transaction on January 1, 2017 on the books of whispering (the lessee) - Journal Entry Debit Credit Date 3322952 Jani, 2017 Account titles and Explanation Leased Machines alc Lease Liability alc Co to record lease agreement) 3322.952 © prepare the Journal entry to record the transaction on January, 2017 on the books of Metlock (the lessor) Journal Entry Date Account titles and Explanation Debit credit Jani, 2017 3322952 lease receivable are Machinery and (To necord lease agreement 3322952

a) prepare the Journal Entries for both the lessee and less or to record first rental payment on January 1, 2017 Journal Entry Date I credit Jan, 2017 Clessee) 397478 Account Titles and Debit Explanation lease liability at 397478 To cash ac C- To record first lease rental payment) Cash are 397478 lease Teceivable alc (To record collection of first Leate Tenbal) Jarl, 2017 Clesso 397478

working Notes O present Value of lease payments : lease payments = $397478 Tentaly lease term = 10 years Implicit Interest - 6% Tate Guranteed yesidual value = 0 Present Value of lease payments = lease rentals XPVAF (6%, 10 years+1) (lease rentals paid at the beginning of year) present value Annuity Factor[ 67.,loy] = 7.36009 CPVAF) $19=478 * 4:36009)+)7 Present value of lease payments = $5 397.478 X 8.36009) = $ 3322 952