Question
(Note: Problems 21, 22, and 23 are three variations of the same basic situation.) On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya
(Note: Problems 21, 22, and 23 are three variations of the same basic situation.) On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $365,760 and has an expected useful life of six years. Its normal sales price is $365,760. The lessee-guaranteed residual value at December 31, 2022, is $25,000. Equal payments under the lease are $100,000 and are due on December 31 of each year. The first payment was made on December 31, 2018.Page 891 Western Soyas incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation.
Required:
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Show how Rhone-Metro calculated the $100,000 annual lease payments.
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How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? Why?
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Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2018.
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Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
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Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2019 (the second lease payment and depreciation).
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Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500.
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