P21-3B (Lessee-Lessor Entries, Balance Sheet Presentation, Sales-Type Lease) Manatee Industriesand Sea Cow Inc. enter into an agreement that requires Sea Cow Inc. to build two charter fishing boatsto Manateeâs specifications. Upon completion of the boats, Manatee has agreed to lease them for aperiod of 8 years and to assume all costs and risks of ownership. The lease is noncancelable, becomeseffective on January 1, 2014, and requires annual rental payments of $84,591 each January 1, startingJanuary 1, 2014.Manateeâs incremental borrowing rate is 12%. The implicit interest rate used by Sea Cow Inc. andknown to Manatee is 8%. The total cost of building the two boats is $450,000. The economic life of the boatsis estimated to be 8 years, with residual value set at zero. Manatee depreciates similar equipment on astraight-line basis. At the end of the lease, Manatee assumes title to the boats. Collectibility of the leasepayments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.2 83 42 89B PROBLEMSChapter 21 Accounting for LeasesInstructions(Round all numbers to the nearest dollar.)(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment onJanuary 1, 2014.(e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) atDecember 31, 2014. (Prepare a lease amortization schedule for 2 years.)(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December31, 2014, for both the lessee and the lessor.
