Problem 15-22 (Algo) Purchase option reasonably certain to be exercised before lease term ends; nonlease payments; sales-type lease [LO15-3, 15-6, 15-7]

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 $300,000 to manufacture and has an expected useful life of six years.
• Its normal sales price is $366,633.
• The expected residual value of $40,000 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 $20,000.
• Equal payments under the lease are $136,000 (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 14%.
• Western Soya knows the interest rate implicit in the lease payments is 12%. 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:

1. Show how Rhone-Metro calculated the $136,000 annual lease payments.
2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)?
3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.
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, 2025 (the second rent payment and amortization).
6. 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: 1. Show how Rhone-Metro calculated the $136,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024. 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, 2025 (the second rent payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2027, assuming the purchase option is exercised on that date. Complete this question by entering your answers in the tabs below. 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 Western Soya Company on December 31, 2024. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar. Journal entry worksheet 2 Note: Enter debits before credits. repare the appropriate entries for Rhone-Metro on December 31, 2024. lote: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate nd final answers to nearest whole dollar. Journal entry worksheet Record lease in the books of lessor. Note: Enter debits before credits. Required: 1. Show how Rhone-Metro calculated the $136,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024. 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, 2025 (the second rent payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2027, assuming the purchase option is exercised on that date. Complete this question by entering your answers in the tabs below. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee. Note: Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values. 1. Show how Rhone-Metro calculated the $136,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024. 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, 2025 (the second rent payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2027, assuming the purchase option is exercised on that date. Complete this question by entering your answers in the tabs below. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessor. Note: Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values. repare the appropriate entries for Western Soya on December 31, 2025 (the second rent payment and amortization). lote: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round termediate calculations. Round your final answers to the nearest whole dollar amount. Journal entry worksheet Record amortization expense in the books of lessee. Note: Enter debits before credits. Prepare the appropriate entries for Rhone-Metro on December 31, 2025 (the second rent payment and amortization). Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar. Journal entry worksheet Record cash received in the books of lessor. Note: Enter debits before credits. Prepare the appropriate entries for Western Soya on December 30,2027 , assuming the purchase option is exercised on that date. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediat and final answers to nearest whole dollar. Journal entry worksheet Record amortization expense in the books of lessee. Note: Enter debits before credits. Prepare the appropriate entries for Rhone-Metro on December 30,2027 , assuming the purchase option is exercised on that date. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar. Journal entry worksheet Record cash received for bargain purchase in the books of lessor. Note: Enter debits before credits. Complete this question by entering your answers in the tabs below. Show how Rhone-Metro calculated the $136,000 annual lease payments. Note: Round your intermediate and final answers to nearest whole dollar