Question

5.

Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2018, Rhone-Metro 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 $820,000 to manufacture and has an expected useful life of six years. Its normal sales price is $875,879. The expected residual value of $40,000 at December 31, 2022, is not guaranteed. Equal payments under the lease are $255,000 (including $5,000 maintenance costs) 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 14%. Western Soya knows the interest rate implicit in the lease payments is 12%. Both companies use straight-line depreciation. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $) (Use appropriate factor(s) from the tables provided.) Show how Rhone-Metro calculated the $255,000 annual lease payments. (Round your intermediate and final answers to nearest whole dollar.) Unguaranteed Residual Value Table or calculator function: Present Value Amount to be recovered Amount to be recovered through periodic lease payments Lease Payments Table or calculator function: Lease Payments Lease payments at the beginning of each of four years Lease payments including executory costs How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? Western Soya Co Rhone-Metro Industries Prepare the appropriate entries for Western Soya Co. on December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Im 1 Record lease in the books of lessee. Record cash payment in the books of lessor. 2 Prepare the appropriate entries for Rhone-Metro on December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) In Record lease in the books of lessor. 1 2 Record cash received in the books of lessor. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee. (Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.) Lease Amortization Schedule Effective Decrease in Outstanding Dec.31 Payments Interest Balance Balance 2018 2019 2020 2021 Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessor. (Round your intermediate and final answers to nearest whole dollar. Enter all amounts as positive values.) Lease Amortization Schedule Effective Decrease in Outstanding Dec.31 Payments Interest Balance Balance 2018 2018 2019 2020 2021 2022 Prepare the appropriate entries for Western Soya on December 31, 2019 (the second lease payment and amortization). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Import a Record amortization expense in the books of lessee. 1 Record maintenance expense in the books of lessee. 2 Record cash payment in the books of lessee. 3 Prepare the appropriate entries for Rhone-Metro on December 31, 2019 (the second lease payment and amortization). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Im Record cash received in the books of lessor. 1 Prepare the appropriate entries Western Soya on December 31, 2022, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Record maintenance expense in the books of lessee. 1 Record amortization expense in the books of lessee. 2 Prepare the appropriate entries for Rhone-Metro on December 31, 2022, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to nearest whole dollar.) Imp Record the end of the lease in the books of lessor. 1

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you Requirement 1 Lessor's Calculation of Lease payments Amount to be recovered (fair value) 875,879 Less: Present value of the BPO price($40,000x.63552*) Amount to be recovered through periodic lease payments S-25,421 5850,458 Lease payments at the beginning of each of three years: 5850,4583.40183**) Plus: Executory costs Lease payments including executory costs present value of $1: n-4, i-12% ** present value of an annuity due of $1n4, i-12% 250,000 S 5,000 255,000 Requirement 2 Application of Classification Criteria Does the agreement specify that ownership of the asset transfers to the lessee? NO Does the agreement contain a bargain purchase option? YES Is the lease term equal to 75% or more of the expected NO economic life of the asset? (3 yrsa < 75% of 6 yrs} Is the present value of the minimum lease payments equal to or greater than 90% of the YES fair value of the asset? By Western Soya Co. (the lessee) Since at least one classification criterion is met, this is a capital lease to the lessee. Western Soya records the present value of minimum lease payments as a le By Rhone-Metro (the lessor) Since the fair value exceeds the lessor's carrying value, the equipment is being "sold" at a profit, making this a sales-type lease: Fair value 875,879 minus Carrying value 820,000 equals Dealer's profit 55,879 Requirement 3 December 31, 2016 Western Soya co. (Lessee) Leased equipment (calculated above) Lease payable (calculated above) 850,458 $850,458 Lease payable 250,000 Prepald maintenance expense (2012 executory costs) Cash (lease payment) 5,000 $255,000 Rhone-Metro (Lessor) Lease receivable present value of minimum lease payments) Cost of goods sold (lessor's cost) Sales revenue (present value of minimum lease payments) Inventory of equipment (lessor's cost) 850,458 820,000 S850,458 820,000 Cash (lease payment) Payable maintenance, insurance, etc.) 255,000 $ 5,000 250,000 Lease receivable

Requirement 4 Lease Amortization Schedule Effective Decrease Outstanding Payments Interest in Balance Balance 12% x Outstanding Balance $850,458 $250,000 600,458 2018 250,000 250,000 5 2018 S 2019 S 72,055 $177,945 S 422,513 50,702 $199,299 $ 223,214 26,786 $223,214 5 2020 2021 S 250,000 250,000 $ Total 149,542 $850,458 1,000,001 Lease Amortization Schedule Effective Decrease Outstanding Payments Interest in Balance Balance 12% x Outstanding Balance $ 875,879 2018 S $250,000 625,879 250,000 2019 S 75,105 $174,895 S 450,984 54,118 $195,882$ 255,102 30,612 $219,388 35,714 250,000 5 2020 2021 $ 250,000 250,000 $ 2022 $ 40,000 4,286 35,714 $ 164,122 $875,879 -0 1,040,001 Total Requirement 5 December 31, 2019 Western Soya Co. (Lessee) Depreciation expense ($850,458 4 years* 212,615 Accumulated depreciation 212,615 Maintenance expense (2019 executory costs) Prepaid maintenance expense (paid in 2018) 5,000 $ 5,000 Interest expense 72,055 Lease payable (to balance) 177,945 Prepaid maintenance expense (2020 executory costs) Cash (lease payment) 5,000 255,000 Rhone-Metro (Lessor) Cash (ase payment) Payable (maintenance) Lease receivable (to balance) Interest revenue (10% x [S365760-130,9601) 255,000 $ 5,000 $174,895 75,105 Requirement 6 December 31, 2021 Western Soya Club (Lessee) Depreciation expense ($409,007 6 years) 212,615 $212,615 Accumulated depreciation Maintenance expense (2021 executory costs) 5,000 $ 5,000 Prepaid maintenance expense (pald in 2020) Prepaid maintenance expense (2022 executory costs) 5,000 $ 5,000 Cash (paid to lessor or supplier of services) Accumulated Depreciation 850,458 Leased equipment 850,458