7....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, 2020, and requires annual rental payments of $370,847 each January 1, starting January 1, 2020.Stellar’s incremental borrowing rate is 8%. The implicit interest rate used by Pearl and known to Stellar is 7%. The total cost of building the three engines is $2,362,000. 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. (b) Prepare the journal entry to record the transaction on January 1, 2020, 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 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 ExplanationDebitCredit (c) Prepare the journal entry to record the transaction on January 1, 2020, on the books of Pearl (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 ExplanationDebitCredit (d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2020. (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 ExplanationDebitCreditLessee (January 1, 2020) Lessor (January 1, 2020)DebitCredit Save for Later Attempts: 0 of 1 usedSubmit Answer (e1)The parts of this question must be completed in order. This part will be available when you complete the part above. (e2)The parts of this question must be completed in order. This part will be available when you complete the part above. (f)The parts of this question must be completed in order. This part will be available when you complete the part above. (g)The parts of this question must be completed in order. This part will be available when you complete the part above.

Calculation of depreciation Building cost = $2362000 / 10 years = 236200 Statement of lease…

7....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, 2020, and requires annual rental payments of $370,847 each January 1, starting January 1, 2020. Stellar’s incremental borrowing rate is 8%. The implicit interest rate used by Pearl and known to Stellar is 7%. The total cost of building the three engines is $2,362,000. 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. (b) Prepare the journal entry to record the transaction on January 1, 2020, 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 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

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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7....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, 2020, and requires annual rental payments of $370,847 each January 1, starting January 1, 2020.

Stellar’s incremental borrowing rate is 8%. The implicit interest rate used by Pearl and known to Stellar is 7%. The total cost of building the three engines is $2,362,000. 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.

(b) Prepare the journal entry to record the transaction on January 1, 2020, 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 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, 2020, on the books of Pearl (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, 2020. (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, 2020)


Lessor (January 1, 2020)	Debit	Credit

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