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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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7...new...continue b Sage Industries and Pronghorn Inc. enter into an agreement that requires Pronghorn Inc. to build three diesel-electric engines to Sage’s specifications. Upon completion of the engines, Sage has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2020, and requires annual rental payments of $405,443 each January 1, starting January 1, 2020.Sage’s incremental borrowing rate is 8%. The implicit interest rate used by Pronghorn and known to Sage is 7%. The total cost of building the three engines is $2,685,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Sage depreciates similar equipment on a straight-line basis. At the end of the lease, Sage assumes title to the engines. Collectibility of the lease payments is probable. (b) Prepare the journal entry to record the transaction on January 1, 2020, on the books of…
On January 1, 2020, Beatrice Company sold an equipment with a remaining life of 20 years and immediately lease it back for a period of 5 years. Below are the relevant data:· Sale price at above fair value: P20,000,000· Fair value of building: 18,000,000· Carrying amount of building: 10,800,000· Annual rental payable at the end of each year: 1,500,000· Implicit rate: 12%PV factor for an ordinary annuity at 12% for five periods is 3.60. How much shall the buyer-lessor recognize as gross rental income and depreciation of the building, respectively? a. 555,556 ; 900,000 b. 944,444 ; 900,000 c. 555,556 ; 1,000,000 d. 944,444 ; 3,600,000
A2
At the beginning of 2024, VHF Industries acquired a machine with a fair value of $6,000,000 by signing a four-year lease, which is the expected useful life of the machine passing. The lease is payable in four annual payments of $1,892,825 at the end of each year. (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. What is the effective rate of interest implicit in the agreement? 2-4. Prepare the lessee's journal entries at the inception of the lease, the first lease payment at December 31, 2024 and the second lease payment at December 31, 2025. 5. Suppose the fair value of the machine and the lessor's implicit rate were unknown at the time of the lease, but that the lessee's incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee's journal entries for 2024. Complete this question by entering your answers in the tabs below. Req 1 Req 2 to 4 Req 5 Suppose the fair…