Question
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
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 $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17,000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Western Soyas incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. 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.)
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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 $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17.000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 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 10%. Western Soya knows the interest rate implicit in the lease payments is 9% 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 $86,000 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, 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 $1,200. Unguaranteed Residual Value Table or calculator function: PV of $1 n = 4 11 9% Present Value 294,546 Amount to be recovered Less: Present value of the unguaranteed residual value Amount to be recovered through periodic lease payments Lease Payments Table or calculator function: n = Lease Payments Lease payments at the beginning of each of four years Add: Maintenance costs Lease payments including executory costs Required 1 Required 2 Required 3 Required 3 Required 4 Lessee Lessor Lessee Required 4 Lessor Required 5 Lessee Required 5 Lessor Required 6 Required 6 Lessee Lessor How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? Western Soya Co. Rhone-Metro Industries vui Trai City vvv ngIices Record lease in the books of lessee. Note: Enter debits before credits. General Journal Debit Credit Date December 31, 2021 Record entry Clear entry View general Journal JournaI CILIY MUINSUCCUStep by Step Solution
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