Answered: Assume that Winston incurs legal fees…

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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Question: Winston Industries and Ewing SA enter into an agreement that requires Ewing 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 non-cancelable, becomes effective on January 1, 2019, and requires annual rental payments of €384,532 each January 1, starting January 1, 2019.

The implicit interest rate used by Ewing is 6% and unknown to Winston. Winston's incremental borrowing rate 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 probable.

Required: Assume that Winston incurs legal fees related to the execution of the lease of €30,000. In addition, assume Winston receives a lease incentive from Ewing of €50,000 to enter the lease. Compute the value of the lease liability and the value of the Right-of-Use asset to the lessee at the commencement of the lease. (Round all amounts to the nearest euro.)

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