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 $715,170 and has an expected useful life of six years. Its normal sales price is $715,170. The lessee-guaranteed residual value at December 31, 2022, is $28,000. Equal payments under the lease are $205,000 and are due on December 31 of each year. The first payment was made on December 31, 2018. Western Soyas incremental borrowing rate is 14%. Western Soya knows the interest rate implicit in the lease payments is 12%. 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 tables provided.) Required: 1. Show how Rhone-Metro calculated the $205,000 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, 2018. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2019 (the second lease payment and depreciation). 6. 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.

10 Required 3 lessee Required 3 lessor Required 4 lessor Required 4 lessee Required 5 lessee Required 5 lessor Required 6 lessee Required 6 lessor Required 1 Required 2 Show how Rhone-Metro calculated the $205,000 annual lease payments 9.23 points Guaranteed Residual Value Table or calculator function: eBook Print Present Value References Amount to be recovered Amount to be recovered through periodic lease payments Lease Payments Table or calculator function Lease Payments Lease payments at the beginning of each of the next four years Required 1 Required 2 >