On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co.

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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 $402,611 and has an expected useful life of six years. Its normal sales price is $402,611. The lessee-guaranteed residual value at December 31, 2022, is $20,000. Equal payments under the lease are $110,000 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 11%. Western Soya knows the interest rate implicit in the lease payments is 9%. 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 $110,000 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 n amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.


5.

Prepare 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 $1,200.

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