Problem 15 8 Guaranteed residual value direct financing lease LO15 3, 15 5, 15 8 On December 31, 2016, Rhone Metro Industries leased equipment to Western Soya Co for a four year period ending December 31, 2020, 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, 2020, 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, 2016 Collectibility of the remaining lease payments is reasonably assured, and Rhone Metro has no material cost uncertainties Western Soyas incremental borrowing rate is 12 Western Soya knows the interest rate implicit in the lease payments is 10 Both companies use straight line depreciation (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided ) Required 1 Show how Rhone Metro calculated the $100,000 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, 2016 (If no entry is required for a transaction event, select No journal entry required in the first account field ) Western Soya Co (Lessee) Rhone Metro (Lessor) 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, 2017 (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 ) Western Soya Co (Lessee) Rhone Metro (Lessor) 6 Prepare the appropriate entries for both Western Soya and Rhone Metro on December 31, 2020 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 ) Western Soya Club (Lessee) Rhone Metro (Lessor)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 09, 2024

Problem 15-8 Guaranteed residual value; direct financing lease [LO15-3, 15-5, 15-8] On December 31, 2016, Rhone-Metro Industries leased equipment to Western Soya Co. for a

Problem 15-8 Guaranteed residual value; direct financing lease [LO15-3, 15-5, 15-8]

On December 31, 2016, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2020, 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, 2020, 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, 2016. Collectibility of the remaining lease payments is reasonably assured, and Rhone-Metro has no material cost uncertainties. Western Soyas incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1.	Show how Rhone-Metro calculated the $100,000 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, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Western Soya Co. (Lessee)

Rhone-Metro (Lessor)

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, 2017 (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.)

Western Soya Co. (Lessee)

Rhone-Metro (Lessor)

6.	Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2020 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.)