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 $875,879 and has an expected useful life of six years. Its normal sales price is $875,879. The lessee-guaranteed residual value at December 31, 2022, is $40,000. Equal payments under the lease are $250,000 and are due on December 31 of each year. The first payment was made on December 31, 2018. Western Soya's 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 $1andPVAD of $1)(Use appropriate factor(s) from the tables provided.)

Required:

1.Show how Rhone-Metro calculated the $250,000 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.

Additional information

1) Guaranteed Residual Value

Table or calculator function:

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Present Value=

Amount to be recovered=

Amount to be recovered through periodic lease payment=

Lease Payment

Table or Calculator function:

n=

i=

Lease payments at the beginning of each of the next four years=

2)How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)?

Western Soya Co.=

Rhone-Metro Industries =

3) Prepare the appropriate entries for Western Soya Co. on December 31, 2018.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

1) Record Lease

2) Record Cash received

Date General Journal Debit Credit

4) Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessor.(Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.

Lease Amortization Schedule

effective decrease outstand

Dec.31 Payments Interest Balance Balance

2018

2018

2019

2020

2021

2022

5) Prepare all appropriate entries for Western Soya on December 31, 2019 (the second lease payment and depreciation).(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal Entry Worksheet

1) Record cash Payment

2) Record amortization expense

Date General Journal Debit Credit

6) Prepare the appropriate entries for both Western Soya on December 31, 2022 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal Entry worksheet

1)Record Amortization expense

2) Record the end of the lease

Date General Journal Debit Credit