Stellar Industries and Pearl Inc. enter into an agreement that requires Pearl In
ID: 2436916 • Letter: S
Question
Stellar Industries and Pearl Inc. enter into an agreement that requires Pearl Inc. to build three diesel- electric engines to Stellar's specifications. Upon completion of the engines, Stellar 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. Stellar's incremental borrowing rate is 8%. The implicit interest rate used by Pearl and known to Stellar 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. Stellar depreciates similar equipment on a straight-line basis. At the end of the lease, Stellar assumes title to the engines. Collectibility of the lease payments is probable. Click here to view the factor table. (b) Prepare the journal entry to record the transaction on January 1, 2017, on the books of Stellar (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 o for the amounts. Round present value factor calculations to 5 decimal plac 1.25124 and the final answer to 0 decimal places e.g. 58,971 Account Titles and Explanation Debit Credit Buildings 2700000 le 2700000 (c) Prepare the journal entry to record the transaction on January I, 2017, on the books o lessor). (Credit account titles are automatically indented when amount is entered. Do not indent manually. I for the amounts. Round answers to O decimal places e.g. 58,971 f Pearl (the f no entry is required, select "No Entry" for the account titles and enter o .) Account Titles and Explanation Debit CreditExplanation / Answer
Present Value of Lease Payments
$397,478 X 7.80169*................................................... $3,101,000
*Present value of an annuity due at 6% for 10 years, rounded by $.14.
Dealer Profit
Sales (present value of lease payments)................... $3,101,000
Less cost of engines..................................................... 2,700,000
Profit on sale.................................................................... $ 401,000
(b) Leased Equipment............................................ 3,101,000
Lease Liability............................................. 3,101,000
(c) Lease Receivable.............................................. 3,101,000
Cost of Goods Sold........................................... 2,700,000
Sales Revenue............................................ 3,101,000
Inventory...................................................... 2,700,000
(d) Lessee (January 1, 2017)
Lease Liability.................................................... 397,478
Cash.............................................................. 397,478
Lessor (January 1, 2017)
Cash..................................................................... 397,478
Lease Receivable....................................... 397,478
(e) STELLAR INDUSTRIES
Lease Amortization Schedule
Date
Annual Lease Receipt/ Payment
Interest on Receivable/ Liability at 6%
Reduction in Receivable/ Liability
Lease Receivable/ Liability
1/1/17
$3,101,000
1/1/17
$397,478
$ –0–
$397,478
2,703,522
1/1/18
397,478
162,211
235,267
2,468,255
1/1/19
397,478
148,095
249,383
2,218,872
Lessee (December 31, 2017)
Interest Expense................................................ 162,211
Interest Payable.......................................... 162,211
Lessor (December 31, 2017)
Interest Receivable............................................ 162,211
Interest Revenue......................................... 162,211
Date
Annual Lease Receipt/ Payment
Interest on Receivable/ Liability at 6%
Reduction in Receivable/ Liability
Lease Receivable/ Liability
1/1/17
$3,101,000
1/1/17
$397,478
$ –0–
$397,478
2,703,522
1/1/18
397,478
162,211
235,267
2,468,255
1/1/19
397,478
148,095
249,383
2,218,872
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.