In: Accounting

# On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period...

On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, 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, 2022, 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, 2018. 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. Use (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 $100,000 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, 2018. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2019 (the second lease payment and depreciation). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is$1,500.

## Solutions

##### Expert Solution

 1 Let X = Amount of each annual payment PVAF @ 10% for 4 years = 3.48685 Residual Value = 0.68301*25000 17075 3.48685X + 17,075 = 365,760 X = 348,685 / 3.48685    = 100,000 2 sales-type because cost and fair market value are not equal 3 Western Soya Co. (Lessee) Leased Asset 348685 Lease payable 348685 100000*3.48685 Lease payable 100000 Cash 100000 Rhone-Metro (Lessor) Lease receivable 365760 Cost of goods sold 365760-17075 348685 Sales 365760-17075 348685 Equipment 365760 Cash 100000 Lease Receivable 100000
 4 Date Payment Interest @ 10% Principal Balance 12/31/2022 365,760 12/31/2022 100000 - 100,000 265,760 12/31/2023 100000 26,576 73,424 192,336 12/31/2024 100000 19,234 80,766 111,570 12/31/2025 100000 11,157 88,843 22,727 12/31/2026 25000 2,273 22,726 0 4 Date Payment Interest @ 10% Principal Balance 12/31/2022 348,685 12/31/2022 100000 - 100,000 248,685 12/31/2023 100000 24,869 75,132 173,554 12/31/2024 100000 17,355 82,645 90,909 12/31/2025 100000 9,091 90,909 (0)
 5.Western Soya Lease payable 75,132 Interest expense 24,869 Cash 100,000 Depreciation expense 87,171 Accumulated depreciation 87,171 348685/4 Rhone-Metro Cash 100,000 Lease Receivable 73,424 Interest revenue 26,576 6 Western Soya Depreciation expense 87,171 Accumulated depreciation 87,171 Accumulated depreciation 348,685 Leased asset 348,685 Rhone-Metro Aaset 1500 Loss on leased asset 25000-1500 23500 Lease receivable 22726 Interest revenue 2274

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