On December 31, 2018, Rhone-Metro Industries leased equipment toWestern Soya Co. for a four-year period ending December 31, 2022,at which time possession of the leased asset will revert back toRhone-Metro. The equipment cost Rhone-Metro $607,484 and has anexpected useful life of six years. Its normal sales price is$607,484. The lessee-guaranteed residual value at December 31,2022, is $25,000. Equal payments under the lease are $160,000 andare due on December 31 of each year. The first payment was made onDecember 31, 2018. Western Soya’s incremental borrowing rate is 8%.Western Soya knows the interest rate implicit in the lease paymentsis 6%. Both companies use straight-line depreciation. Use (FV of$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)(Use appropriate factor(s) from the tablesprovided.)

Required:

1. Show how Rhone-Metro calculated the $160,000annual lease payments.
2. How should this lease be classified (a) byWestern Soya Co. (the lessee) and (b) by Rhone-Metro Industries(the lessor)?
3. Prepare the appropriate entries for bothWestern Soya Co. and Rhone-Metro on December 31, 2018.
4. Prepare an amortization schedule(s) describingthe pattern of interest over the lease term for the lessee and thelessor.
5. Prepare all appropriate entries for both WesternSoya and Rhone-Metro on December 31, 2019 (the second lease paymentand depreciation).
6. Prepare the appropriate entries for both Western Soya andRhone-Metro on December 31, 2022 assuming the equipment is returnedto Rhone-Metro and the actual residual value on that date is$1,500.