Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2024, Rhone-Metro leased equipment to Western Soya Company for a noncancelable stated lease term of four years ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro.

The equipment cost $400,000 to manufacture and has an expected useful life of six years.

Its normal sales price is $453,627.

The expected residual value of $29,000 on December 31, 2028, is not guaranteed.

Western Soya Company is reasonably certain to exercise a purchase option on December 30, 2027, at an option price of $12,000.

Equal payments under the lease are $170,000 (including $6,000 annual maintenance costs) and are due on December 31 of each year.

The first payment was made on December 31, 2024.

Western Soyas incremental borrowing rate is 14%.

Western Soya knows the interest rate implicit in the lease payments is 11%. Both companies use straight-line depreciation or amortization.

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

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:

1 Show how Rhone-Metro calculated the $170,000 annual lease payments.

2 How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)?

3 Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.

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, 2025 (the second rent payment and amortization).

6 Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 30, 2027, assuming the purchase option is exercised on that date.