Question

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston 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 \(413,971 each January 1, starting January 1, 2017.

Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. 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 depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Instructions

(c) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Ewing Inc.

Short answer

Total inventory is $2,600,000.

Step-by-step solution

Meaning of Lease

A lease is a contract that provides for the transfer of land, buildings, and other propertyto another for a specified period of time or at the discretion of the lessor or lessee in exchange for rent or other payments.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
Jan. 1, 2017	Lease Receivable	3,000,000
	Cost of Goods Sold	2,600,000
	Sales Revenue		3,000,000
	Inventory		2,600,000