P 15-22 Unguaranteed residual value; nonlease payments; sales-type lease L015-2, 2015-6, 2015-7 Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro 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 $300,000 to manufacture and has an expected useful life of six years. Its normal sales price is $365,760. The expected residual value of $25,000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $104,000 (including $4,000 maintenance costs) 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 $ 104,000 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)? Why? 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 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 $1,500. Requirement 1: MID-SOUTH AUTO LEASING Dealer's Profit Present value of quarterly lease payments Plus: Present value of the BPO price Present value of minimum lease payments Truck's cost Dealer's profit Lessor's Calculation of Quarterly Payments Amount to be recovered (fair value) Less: Present value of the BPO price Amount to be recovered through quarterly lease payments Lease payment at the beginning of each of the next 8 quarters Requirement 2 Journal entries on September 30, 2021 General Journal Debit Credit Account Anything Grows (Lessee) Right-of-use asset Lease payable Lease payable Cash Mid-South Auto Leasing (Lessor) Lease receivable Cost of goods sold Sales revenue Equipment Cash Lease receivable Requirement 3: Lease Amortization Schedule Effective Interest 3% Decrease in Balance Outstanding Balance Payments Date 9/30/21 9/30/21 12/31/21 3/31/22 6/30/22 9/30/22 12/31/22 3/31/23 6/30/23 9/29/23 Requirement 4: Journal entries on December 31, 2021 General Journal Debit Credit Account Anything Grows (Lessee) Amortization expense Right-of-use asset Interest expense Lease payable Cash Mid-South Auto Leasing (Lessor) Cash Lease receivable Interest revenue Requirement 5: Journal entries on September 29, 2023 General Journal Debit Credit Account Anything Grows (Lessee) Amortization expense Right-of-use asset Interest expense Lease payable Cash IL Mid-South Auto Leasing (Lessor) Cash Lease receivable Interest revenue