Problem 15 9 Unguaranteed residual value executory costs sales type lease LO15 6, 15 8, 15 9 Rhone Metro Industries manufactures equipment that is sold or leased On December 31, 2013, Rhone Metro leased equipment to Western Soya Co for a four year period ending December 31, 2017, at which time possession of the leased asset will revert back to Rhone Metro The equipment cost $425,000 to manufacture and has an expected useful life of six years Its normal sales price is $487,946 The expected residual value of $22,000 at December 31, 2017, is not guaranteed Equal payments under the lease are $136,000 (including $6,000 executory costs) and are due on December 31 of each year The first payment was made on December 31, 2013 Collectibility of the remaining lease payments is reasonably assured, and Rhone Metro has no material cost uncertainties Western Soyas incremental borrowing rate is 9 Western Soya knows the interest rate implicit in the lease payments is 7 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 $136,000 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, 2013 (If no entry is required for a particular transaction, select No journal entry required in the first account field Enter your answers in whole dollars ) Western Soya Co (Lessee) Rhone Metro 4 Prepare an amortization schedules describing the pattern of interest over the lease term for the lessee and the lessor Lessee (unguaranteed residual value excluded) Lessor (unguaranteed residual value included) 5 Prepare the appropriate entries for both Western Soya and Rhone Metro on December 31, 2014 (the second lease payment and depreciation) (If no entry is required for a particular transaction, select No journal entry required in the first account field Enter your answers in whole dollars ) 6 Prepare the appropriate entries for both Western Soya and Rhone Metro on December 31, 2017, assuming the equipment is returned to Rhone Metro and the actual residual value on that date is $1,000 (If no entry is required for a particular transaction, select No journal entry required in the first account field Enter your answers in whole dollars )

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Problem 15-9 Unguaranteed residual value; executory costs; sales-type lease [LO15-6, 15-8, 15-9] Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2013,

Problem 15-9 Unguaranteed residual value; executory costs; sales-type lease [LO15-6, 15-8, 15-9]

Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2013, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2017, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $425,000 to manufacture and has an expected useful life of six years. Its normal sales price is $487,946. The expected residual value of $22,000 at December 31, 2017, is not guaranteed. Equal payments under the lease are $136,000 (including $6,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payments is reasonably assured, and Rhone-Metro has no material cost uncertainties. Western Soyas incremental borrowing rate is 9%. Western Soya knows the interest rate implicit in the lease payments is 7%. 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 $136,000 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, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

	Western Soya Co. (Lessee)

	Rhone-Metro

4.	Prepare an amortization schedules describing the pattern of interest over the lease term for the lessee and the lessor.

	Lessee (unguaranteed residual value excluded):

	Lessor (unguaranteed residual value included):

5.	Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2014 (the second lease payment and depreciation). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

6.	Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2017, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,000. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)