Pina Industries and Grouper Inc. enter into an agreement that requires Grouper I

Question

Pina Industries and Grouper Inc. enter into an agreement that requires Grouper Inc. to build three diesel-electric engines to Pina's specifications. Upon completion of the engines, Pina 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 $419,681 each January 1, starting January 1, 2017. Pina's incremental borrowing rate is 9%. The implicit interest rate used by Grouper Inc. and known to Pina is 79 The total cost of building e ree engines s $2,739,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Pina depreciates similar equipment on a straight-line basis. At the end of the lease, Pina assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs. Click h Your answer is partially correct. Try again. (b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Pina Industries. (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 O decimal places e.g. 58,971.) Account Titles and Explanation Debit Credit Leased Equipment 3157802 Lease Lability 3157802

Explanation / Answer

Journal entry:

Leased equipment $3154000

To lease liability $3154000

$419681 * $7.51523(PV of annuity due) = $3154000.

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