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On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. • Its normal sales price is $494,424. • The lessee-guaranteed residual value on December 31, 2028, is $40,000. • Equal payments under the lease are $130,000 and are due on December 31 of each year. • The first payment was made on December 31, 2024. • Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.

On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. • Its normal sales price is $494,424. • The lessee-guaranteed residual value on December 31, 2028, is $40,000. • Equal payments under the lease are $130,000 and are due on December 31 of each year. • The first payment was made on December 31, 2024. • Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. Its normal sales price is $494,424. ● ● ● ● The lessee-guaranteed residual value on December 31, 2028, is $40,000. Equal payments under the lease are $130,000 and are due on December 31 of each year. The first payment was made on December 31, 2024. Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024. 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, 2025 (the second lease payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2028, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,000. Complete this question by entering your answers in the tabs below. Required 3 Required 3 Required 4 Required 4 Lessee Lessor Lessee Lessor Show how Rhone-Metro calculated the $130,000 annual lease payments. Required 1 Required 2 Required 5 Lessee Required 5 Required 6 Lessor Lessee Required 6 Lessor
Transcribed Image Text:On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. Its normal sales price is $494,424. ● ● ● ● The lessee-guaranteed residual value on December 31, 2028, is $40,000. Equal payments under the lease are $130,000 and are due on December 31 of each year. The first payment was made on December 31, 2024. Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024. 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, 2025 (the second lease payment and amortization). 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2028, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,000. Complete this question by entering your answers in the tabs below. Required 3 Required 3 Required 4 Required 4 Lessee Lessor Lessee Lessor Show how Rhone-Metro calculated the $130,000 annual lease payments. Required 1 Required 2 Required 5 Lessee Required 5 Required 6 Lessor Lessee Required 6 Lessor
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