Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a concancelanle stated lease term of four years ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $320,000 to manufacture and has an expected useful life of six years. It's normal sales price is $392,452. The expected residual value of $17,000 at December 31, 2025, is not guaranteed. Western Soya Co. is reasonably certain to exercise a purchase option on December 30,2024, at an option price of $8000. Equal payments under the lease are $143,000 (including $3,000 annual maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, . 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 amortization.

Hint: A lease term ends for accounting purposes when an option becomes exercisable if it's expected to be exercised (i.e., a BPO).

Required:

1. Show how Rhone-Metro calculated the $143,000 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. Lessee : 1- Record lease in the books of lessee. 2- Record cash payment in the books of lessee. Lessor : 1- Record lease in the books of lessor. 2. Record cash received in the books of lessor.
4. Prepare amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.

Lessee

Dec.31 Payments Effective Interest Decrease in Balance Outstanding Balance

2021

2021

2022

2023

2024

Lessor

Dec.31 Payments Effective Interest Decrease in Balance Outstanding Balance

2021

2021

2022

2023

2024

5.Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2022 (the second rent payment and amortization). Lessee: 1- Record amortization expense in the books of lessee. 2- Record maintenance in the books of lessee. 3- Record cash payment in the books of lessee. Lessor: 1- Record cash received in the books of lessor.

6.Prepare the appropriate entries for Western Soya Co. on December 30, 2024, assuming the purchase option is exercised on that date. Lessee: 1-Record amortization expense in the books of lessee. 2- Record cash payment for bargain purchase option only in the books of lessee. 3- Record maintenance expense in the books of lessee. 4-Record cash payment for executory costs only in the books of lessee. 5- Record transfer of equipment ownership in the books of the lessee. Lessor: 1- Record cash received for bargain purchase in the books of lessor. 2- Record cash received for executory costs in the books of lessor.