Problem
Swifty Industries and Nash Inc. enter into an agreement that requires Nash Inc. to build three diesel-electric engines to Swifty's specifications. Upon completion of the engines, Swifty 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 $412,338 each January 1, starting January 1, 2017. Swifty's incremental borrowing rate is 11%. The implicit interest rate used by Nash Inc. and known to Swifty is 10%. 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. Swifty depreciates similar equipment on a straight-line basis. At the end of the lease, Swifty assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.
a. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Swifty Industries.
b. Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Nash Inc.
c. Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017.
d. Prepare a lease amortization schedule for 2 years.
e. Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2017.
f. Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2017, for both the lessee and the lessor.