(Note: Problems 21, 22, and 23 are three variations of the same
basic situation.)
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.Page 891 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.
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, 2018.
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, 2019 (the second lease payment and depreciation).
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.
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 |
12/31/2018 | 365,760 | |||
12/31/2018 | 100000 | - | 100,000 | 265,760 |
12/31/2019 | 100000 | 26,576 | 73,424 | 192,336 |
12/31/2020 | 100000 | 19,234 | 80,766 | 111,570 |
12/31/2021 | 100000 | 11,157 | 88,843 | 22,727 |
12/31/2022 | 25000 | 2,273 | 22,726 | 0 |
4 | ||||
Date | Payment | Interest @ 10% | Principal | Balance |
12/31/2018 | 348,685 | |||
12/31/2018 | 100000 | - | 100,000 | 248,685 |
12/31/2019 | 100000 | 24,869 | 75,132 | 173,554 |
12/31/2020 | 100000 | 17,355 | 82,645 | 90,909 |
12/31/2021 | 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 |
(Note: Problems 21, 22, and 23 are three variations of the same basic situation.) On December...
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