Rhone-Metro Industries manufactures equipment that is sold orleased. On December 31, 2021, Rhone-Metro leased equipment toWestern Soya Co. for a noncancelable stated lease term of fouryears ending December 31, 2025, at which time possession of theleased asset will revert back to Rhone-Metro. The equipment cost$320,000 to manufacture and has an expected useful life of sixyears. Its normal sales price is $404,357. The expected residualvalue of $18,000 at December 31, 2025, is not guaranteed. WesternSoya Co. is reasonably certain to exercise a purchase option onDecember 30, 2024, at an option price of $8,000. Equal paymentsunder the lease are $147,000 (including $4,000 annual maintenancecosts) and are due on December 31 of each year. The first paymentwas made on December 31, 2021. Western Soya’s incremental borrowingrate is 10%. Western Soya knows the interest rate implicit in thelease payments is 8%. Both companies use straight-lineamortization.
Hint: A lease term ends for accounting purposes when anoption becomes exercisable if it’s expected to be exercised (i.e.,a BPO). (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 andPVAD of $1) (Use appropriate factor(s) from the tablesprovided.)
Required:
1. Show how Rhone-Metro calculated the $147,000annual 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, 2021.
4. Prepare an amortization schedule(s) describingthe pattern of interest over the lease term for the lessee and thelessor.
5. Prepare the appropriate entries for bothWestern Soya and Rhone-Metro on December 31, 2022 (the second rentpayment and amortization).
6. Prepare the appropriate entries for bothWestern Soya and Rhone-Metro on December 30, 2024, assuming thepurchase option is exercised on that date.
Show how Rhone-Metro calculated the $147,000 annual leasepayments. (Round your intermediate and final answers to nearestwhole dollar.)
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| | BPO Price | | | Table or calculator function: | | | n = | | | i = | | | Present Value | | Amount to be recovered | | | | | Amount to be recovered through periodiclease payments | | | | | Lease Payments | | | Table or calculator function: | | | n = | | | i = | | | Lease Payments | | Lease payments at the beginning of eachof three years: | | | | | Lease payments including executorycosts |
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How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)? (Round yourintermediate and final answers to nearest whole dollar.)
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| | | | Western Soya Co. | | | Rhone-Metro Industries | |
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Prepare the appropriate entries for Western Soya Co. on December31, 2021. (If no entry is required for a transaction/event, select"No journal entry required" in the first account field. Round yourintermediate and final answers to nearest whole dollar.)
Journal entry worksheet
- Record lease in the books of lessee.
Note: Enter debits before credits.
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| | Date | General Journal | Debit | Credit |
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| December 31, 2021 | | | | | | | | | | | | | | | | | | | | | |
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