Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a noncancelable 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 $300,000 to manufacture and has an expected useful life of six years. Its normal sales price is $353,599. The expected residual value of $40,000 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 $22,000. Equal payments under the lease are $126,000 (including $4,000 annual 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 11%. 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). (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 $126,000 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 rent payment and amortization) 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2024, assuming the purchase option is exercised on that date. Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Show how Rhone-Metro calculated the $126,000 annual lease payments. (Round your intermediate and final answers to nearest whole dollar.) BPO Price Table or calculator function: n = PV of $1 3 9% Present Value i = Amount to be recovered Less: Present value of the BPO price Amount to be recovered through periodic lease payments Lease Payments Table or calculator function: PVAD of $1 n = 3 Lease payments at the beginning of each of three years: Add: Executory costs Lease payments including executory costs 9% Lease Payments 122,000 4,000 126,000 $ Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? (Round your intermediate and final answers to nearest whole dollar.) Finance lease Western Soya Co. Rhone-Metro Industries Sales-type lease Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare the appropriate entries for Western Soya Co. on December 31, 2021. (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.) No General Journal Debit Credit 1 Date December 31, 202 Right-of-use asset Lease payable 2 December 31, 202 Lease payable Prepaid maintenance expense Cash 122,000 4,000 126,000 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor No Prepare the appropriate entries for Rhone-Metro on December 31, 2021. (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.) Date General Journal Debit Credit December 31, 2021 Lease receivable 122,000 Cost of goods sold Sales revenue Equipment 2 126,000 December 31, 2021 Cash Maintenance fee payable Lease receivable >> 4,000 122,000 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee. (Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.) Lease Amortization Schedule Decrease Effective in Payments Interest Balance Dec.31 2021 2021 2022 2023 Outstanding Balance 353,599 231,599 130,443 20,183 0 122,000 122,000 122,000 22,000 388,000 20,844 11,740 1,816 34,400 122,000 101,156 110,260 20,183 353,599 2024 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessor. (Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.) Lease Amortization Schedule Effective Decrease in Payments Interest Balance Outstanding Balance 353,599 231,599 130,443 20,183 Dec.31 2021 2021 2022 2023 2024 0 122,000 122,000 122,000 22,000 388,000 20,844 11,740 1,816 34,400 122,000 101,156 110,260 20,183 353,599 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare the appropriate entries for Western Soya Co. on December 31, 2022 (the second rent payment and amortization). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) No Credit Date General Journal December 31, 202 Amortization expense Right-of-use asset Debit 353,599 1 353,599 2 4,000 December 31, 202. Maintenance expense Prepaid maintenance expense 4,000 3 December 31, 202 Interest expense Lease payable Cash 20,844 101,156 126,000 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare the appropriate entries for Rhone-Metro on December 31, 2022 (the second rent payment and amortization). (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.) No Debit Credit 1 Date General Journal December 31, 2024 Cash Maintenance fee payable Lease receivable Interest revenue 4,000 Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare the appropriate entries for Western Soya Co. on December 30, 2024, assuming the purchase option is exercised on t (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intern and final answers to nearest whole dollar.) View transaction list View journal entry worksheet Debit Credit Record amortization expense in the books of lessee. 2 Record cash payment for bargain purchase option only in the books of lessee. 4,000 4,000 3 Record maintenance expense in the books of lessee. 4 quired 6 Lessor > Record cash payment for executory costs only in the books of lessee. 5 Record transfer of equipment ownership in the books of lessee. Note : = journal entry has been entered Required 1 Required 2 Required 3 Required 3 Required 4 Required 4 Required 5 Required 5 Required 6 Required 6 Lessee Lessor Lessee Lessor Lessee Lessor Lessee Lessor Prepare the appropriate entries for Rhone-Metro on December 30, 2021, assuming the purchase option is exercised on that date. (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.) No General Journal Debit Credit 1 Date December 31, 2024 Cash Lease receivable Interest revenue N 4,000 December 31, 2024 Cash Maintenance fee payable 4,000
