Question

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 possession of the leased asset will revert back to Rhone-Metro. The equipment cost $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17,000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 maintenance 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 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation. (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.)

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 possession of the leased asset will revert back to Rhone-Metro. The equipment cost $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17.000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 maintenance 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 10%. Western Soya knows the interest rate implicit in the lease payments is 9% Both companies use straight-line depreciation. (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 $86,000 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, 2021. 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, 2022 (the second lease payment and amortization) 6. 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 $1,200.

Part 1

Part 2

Part 3

Part 4

I need help with the first 4 parts of the problem. Thank you, I appreciate your help!

Answer 1

Answer Part-1 Calculation of annual lease paymments. Particulars Amount ($) Amount to be recovered (fair Value) 2,94,546 Less: Present Value of the unguaranteed residual value (17000 x 0.7084*) 12,043 Amount to be recovered through periodic lease payments 2,82,503 Lease payments Amount ($) Lease payments at the beginning of each of four years (2,82,503 / 3.53129**) 80,000 Add: Maintenance Cost 6000 Annual Lease payment (including maintenance cost) 86000 Note: for 4th year * Present value of 1 $; n-4; i=9% = 0.7084 Present value of annuity due 1 $; n=4; 3.53129 ** i=9%

D F G H Part-2 Classification criteria Transfer of ownership specified in 1 agreement? No Bargain Purchase option present in 2 agreement? Yes is the lease term equals to 75% or more Yes of the expected economic life of the (4yrs > 75% 3 asset? of 6 years) is the present value of minimum lease payment equal to 90% or more of the 4 fair value of the asset? Yes a) b) Western Soya Co. It shall be classified as Finance lease, since few of the above criteria are met Rhone-Metro Industries Since the fair value exceeds the lessor's carrying value, the asset is being sold at profit, making it as a sale-type lease: Fair value 2,94,546 Less: Carrying value 2,50,000 Profit 44,546

Debit ($) Credit ($) Part-3 Record lease in the books of lessee S.No Particulars 31st Dec, 2021 Lease equipment A/c Dr. To Lease Payable Ac (Being Lease equipment recorded) 2,82,503 2,82,503 Part-4 Record cash payment in the books of lessee S.No Particulars Debit ($) Credit ($) 31st Dec, 2021 Lease Payable A/C Dr. 80,000 Prepaid Maintenance expenses A/c Dr. 6,000 To Cash A/c (Lease payment) 86,000 (Being Lease payment recorded)