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On December 31, 2021. Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31. 2025, at which time possession of
On December 31, 2021. Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31. 2025, | |
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. 2025, 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. 2021. Western Soya's incremental borrowing rate is 12%. | |
Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation or amortization. | |
Required: | |
1. Show how Rhone-Metro calculated the $100000 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)? Why? | |
3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2021. | |
4. Prepare an amortization schedule 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. 2022 (the second lease payment and amortization). | |
6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2025 | |
, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1500. |
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