Steps for

P $15-21$

Guaranteed

residual value;

sales$-$type lease

LO$15-2,$ LO$15-5,$

LO$15-6$

P $15-22$

Unguaranteed

residual value;

nonlease

payments; sales$-$

type lease

LO$15-2,$ LO$15-6,$

LO$15-7$

$($Note: P $15-21,15-22,$ and $15-23$ are three variations of the same basic situation.$)$

On December $31,2021,$ Rhone$-$Metro Industries 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 Rhone$-$Metro $$365,760$ and has an expected useful life of six years. Its normal sales

price is $$365,760.$ The lessee$-$guaranteed residual value at December $31,2025,$ is $$25,000.$ Equal payments

under the lease are $$100,000$ 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 $12\%.$ Western Soya knows the interest rate

implicit in the lease payments is $10\%.$ Both companies use straight$-$line depreciation or amortization.

Required:

Show how Rhone$-$Metro calculated the $$100,000$ annual lease payments.

How should this lease be classified $($a$)$ by Western Soya Co$.($the lessee$)$ and $($b$)$ by Rhone$-$Metro Industries

$($the lessor$)?$ Why?

Prepare the appropriate entries for both Western Soya Co$.$ and Rhone$-$Metro on December $31,2021.$

Prepare an amortization schedule$($s$)$ describing the pattern of interest over the lease term for the lessee and

the lessor.

Prepare all appropriate entries for both Western Soya and Rhone$-$Metro on December $31,2022($the second

lease payment and amortization$).$

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 $$1,500.$

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 posses$-$

sion 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 $$365,760.$ The expected residual value of $$25,000$

at December $31,2025,$ is not guaranteed. Equal payments under the lease are $$104,000($including $$4,000$ main$-$

tenance 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 $12\%.$ Western Soya knows the interest rate implicit in the lease

payments is $10\%.$ Both companies use straight$-$line depreciation or amortization.

Required:

Show how Rhone$-$Metro calculated the $$104,000$ annual lease payments.

How should this lease be classified $($a$)$ by Western Soya Co$.($the lessee$)$ and $($b$)$ by Rhone$-$Metro Industries

$($the lessor$)?$ Why?

Prepare the appropriate entries for both Western Soya Co$.$ and Rhone$-$Metro on December $31,2021.$