23)

1. The lease asset had a retail cash selling price of $110,000. Its useful life was six years with no residual value (straight-line depreciation).
2. Annual lease payments at the beginning of each year were $22,961, beginning January 1.
3. Lessors implicit rate when calculating annual rental payments was 10%.
4. Costs of $2,269 for legal fees for the lease execution were the responsibility of the lessor.

Required: Prepare the appropriate entries for the lessor to record the lease, the initial payment at its beginning, and at the December 31 fiscal year-end under each of the following three independent assumptions:

1. The lease term is three years and the lessor paid $110,000 to acquire the asset (operating lease). 2. The lease term is six years and the lessor paid $110,000 to acquire the asset (sales-type lease). Also assume that adjusting the lease receivable (net investment) by initial direct costs reduces the effective rate of interest to 9%. 3. The lease term is six years and the lessor paid $90,000 to acquire the asset (sales-type lease).

24)

Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a noncancelable stated lease term of four years ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $300,000 to manufacture and has an expected useful life of six years. Its normal sales price is $375,898. The expected residual value of $17,000 at December 31, 2025, is not guaranteed. Western Soya Co. is reasonably certain to exercise a purchase option on December 30, 2024, at an option price of $8,000. Equal payments under the lease are $140,000 (including $6,000 annual maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Western Soyas incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line amortization. Hint: A lease term ends for accounting purposes when an option becomes exercisable if its expected to be exercised (i.e., a BPO). (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 tables provided.)

Required:

1. Show how Rhone-Metro calculated the $140,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2021. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 (the second rent payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2024, assuming the purchase option is exercised on that date.

BPO Price
Table or calculator function:
n =
i =
	Present Value
Amount to be recovered
Amount to be recovered through periodic lease payments
Lease Payments
Table or calculator function:
n =
i =
	Lease Payments
Lease payments at the beginning of each of three years:
Lease payments including executory costs

Western Soya Co.
Rhone-Metro Industries

Date	General Journal	Debit	Credit
December 31, 2021

Lease Amortization Schedule
		Effective	Decrease in	Outstanding
Dec.31	Payments	Interest	Balance	Balance
2021
2021
2022
2023
2024
	0	0	0