Question
Part two of the question Chegg wouldn't let me post this problem as one due to the length please only due 4-6 on the required
Part two of the question Chegg wouldn't let me post this problem as one due to the length please only due 4-6 on the required
Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2024, Rhone-Metro leased equipment to Western Soya Company for a noncancelable stated lease term of four years ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro.
- The equipment cost $390,000 to manufacture and has an expected useful life of six years.
- Its normal sales price is $445,490.
- The expected residual value of $27,000 on December 31, 2028, is not guaranteed.
- Western Soya Company is reasonably certain to exercise a purchase option on December 30, 2027, at an option price of $12,000.
- Equal payments under the lease are $166,000 (including $5,000 annual maintenance costs) and are due on December 31 of each year.
- The first payment was made on December 31, 2024.
- Western Soyas incremental borrowing rate is 13%.
- Western Soya knows the interest rate implicit in the lease payments is 11%. Both companies use straight-line depreciation or amortization.
[Hint: A lease term ends for accounting purposes when an option becomes exercisable if its expected to be exercised (i.e., a BPO).]
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Required:
- Show how Rhone-Metro calculated the $166,000 annual lease payments. Note: Round your intermediate and final answers to nearest whole dollar.
- How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)?
- Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.
- Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
- Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2025 (the second rent payment and amortization).
- Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2027, assuming the purchase option is exercised on that date.
Required 4 Lessor
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Required 5 Lessee
A)Record amortization expense in the books of lessee.
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B)Record maintenance expense in the books of lessee.
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C)Record cash payment in the books of lessee.
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Required 5 Lessor
A)Record cash received in the books of lessor. dec 31 2025
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Required 6 Lessee
A)Record amortization expense in the books of lessee.
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B)Record cash payment for bargain purchase option in the books of lessee. dec 31 207
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C) Record maintenance expense in the books of lessee. dec 31 2027
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D) Record transfer of equipment ownership in the books of lessee. dec 31 2027
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Required 6 Lessor
A) Record cash received for bargain purchase in the books of lessor. Dec 31 2027
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B) Record the cash payment of maintenance costs in the books of the lessor. December 31, 2027
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