Rhone-Metro Industries manufactures equipment that is sold orleased. On December 31, 2018, Rhone-Metro 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 $600,000 to manufacture and has anexpected useful life of six years. Its normal sales price is$672,747. The expected residual value of $15,000 at December 31,2022, is not guaranteed. Equal payments under the lease are$194,000 (including $4,000 maintenance costs) and are due onDecember 31 of each year. The first payment was made on December31, 2018. Western Soya’s incremental borrowing rate is 12%. WesternSoya knows the interest rate implicit in the lease payments is 10%.Both companies use straight-line depreciation. (FV of $1, PV of $1,FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)

Required:

1. Show how Rhone-Metro calculated the $194,000 annual leasepayments.
2. How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)?
3. Prepare the appropriate entries for both Western Soya Co. andRhone-Metro on December 31, 2018.
4. Prepare an amortization schedule(s) describing the pattern ofinterest over the lease term for the lessee and the lessor.
5. Prepare the appropriate entries for both Western Soya andRhone-Metro on December 31, 2019 (the second lease payment andamortization).
6. Prepare the appropriate entries for both Western Soya andRhone-Metro on December 31, 2022, assuming the equipment isreturned to Rhone-Metro and the actual residual value on that dateis $2,000.