Problem 21A-12 b-g Stellar Industries and Pearl Inc. enter into an agreement tha
ID: 2436920 • Letter: P
Question
Problem 21A-12 b-g 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.Explanation / Answer
Ans- Present Value of Lease Payments
$397,478*7.3601(i6% n-10) $2,925,478
Dealer Profit:
Sales(Present Value of Lease Payments) $2,925,478
Less:Cost of engines 2,700,000
Profit on sale $225,478
Stellar Industries
Lease Amortization Schedule
Journal Entries For Lessee at December 31,2017
(To record interest)
Journal Entries for Lessor at December 31,2017
151,680
STELLAR INDUSTRIES
Balance Sheet(Partial)
Decemnber 31,2017
Assets:
Property,Plant and Equipment:
Leased Property $2,700,000
Less:Accumulated Depreciation 270,000
$2,430,000
Current Liabilities:
Interest Payable $151,680
Lease Liability $245,798
Long-term Liability $2,282,202
PEARL INC.
Balance Sheet (Partial)
December 31,2017
Assets
Current Assets:
Interest receivable $151,680
Lease receivable $245,798
Non current assets:
Lease Receivable $2,282,202
Date Annual Lease Receipt/Payment Interest on Receivable Liability @6% Reduction in Receivable/Liability Lease Receivable/Liability 1/1/17 2,925,478 1/1/17 397,478 397,478 2,528,000 1/1/18 397,478 151,680 245,798 2,282,202 1/1/18 397,478 136,932 260,546 2,021,656Related Questions
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