Problem 15-8 Guaranteed residual value; direct financing lease[LO15-3, 15-5, 15-8]
On December 31, 2016, Rhone-Metro Industries leased equipment toWestern Soya Co. for a four-year period ending December 31, 2020,at which time possession of the leased asset will revert back toRhone-Metro. The equipment cost Rhone-Metro $365,760 and has anexpected useful life of six years. Its normal sales price is$365,760. The lessee-guaranteed residual value at December 31,2020, is $25,000. Equal payments under the lease are $100,000 andare due on December 31 of each year. The first payment was made onDecember 31, 2016. Collectibility of the remaining lease paymentsis reasonably assured, and Rhone-Metro has no material costuncertainties. Western Soyaâs incremental borrowing rate is 12%.Western Soya knows the interest rate implicit in the lease paymentsis 10%. 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 tablesprovided.)
Required:
1. Show how Rhone-Metro calculated the $100,000 annual leasepayments.
2. How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)?
3. Prepare the appropriate entries for both Western Soya Co. andRhone-Metro on December 31, 2016. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field.)
Western Soya Co. (Lessee)
Rhone-Metro (Lessor)
4. Prepare an amortization schedule describing the pattern ofinterest over the lease term for the lessee and the lessor.
5. Prepare all appropriate entries for both Western Soya andRhone-Metro on December 31, 2017 (the second lease payment anddepreciation). (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.)
Western Soya Co. (Lessee)
Rhone-Metro (Lessor)
6. Prepare the appropriate entries for both Western Soya andRhone-Metro on December 31, 2020 assuming the equipment is returnedto 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 accountfield.)
Western Soya Club (Lessee)
Rhone-Metro (Lessor)
Problem 15-8 Guaranteed residual value; direct financing lease[LO15-3, 15-5, 15-8]
On December 31, 2016, Rhone-Metro Industries leased equipment toWestern Soya Co. for a four-year period ending December 31, 2020,at which time possession of the leased asset will revert back toRhone-Metro. The equipment cost Rhone-Metro $365,760 and has anexpected useful life of six years. Its normal sales price is$365,760. The lessee-guaranteed residual value at December 31,2020, is $25,000. Equal payments under the lease are $100,000 andare due on December 31 of each year. The first payment was made onDecember 31, 2016. Collectibility of the remaining lease paymentsis reasonably assured, and Rhone-Metro has no material costuncertainties. Western Soyaâs incremental borrowing rate is 12%.Western Soya knows the interest rate implicit in the lease paymentsis 10%. 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 tablesprovided.) |
| Required: |
| 1. | Show how Rhone-Metro calculated the $100,000 annual leasepayments. |
| 2. | How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)? |
| 3. | Prepare the appropriate entries for both Western Soya Co. andRhone-Metro on December 31, 2016. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field.) |
| Western Soya Co. (Lessee) |
| Rhone-Metro (Lessor) |
| 4. | Prepare an amortization schedule describing the pattern ofinterest over the lease term for the lessee and the lessor. |
| 5. | Prepare all appropriate entries for both Western Soya andRhone-Metro on December 31, 2017 (the second lease payment anddepreciation). (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.) |
| Western Soya Co. (Lessee) |
| Rhone-Metro (Lessor) |
| 6. | Prepare the appropriate entries for both Western Soya andRhone-Metro on December 31, 2020 assuming the equipment is returnedto 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 accountfield.) |
| Western Soya Club (Lessee) |
| Rhone-Metro (Lessor) |
Related questions
Problem 15-3 Direct financing and sales-type lease; lessee andlessor [LO15-3, 15- 5, 15-6]
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones. Physicians'Leasing purchased a lithotripter from Rand for $2,000,000 andleased it to Mid-South Urologists Group, Inc., on January 1,2016. |
| LeaseDescription: | |||
| Quarterly leasepayments | $ | 130,516 âbeginning of eachperiod | |
| Lease term | 5 years (20 quarters) | ||
| No residual value;no BPO | |||
| Economic life oflithotripter | 5 years | ||
| Implicit interestrate and lessee's incremental borrowing rate | 12% | ||
| Fair value ofasset | $ | 2,000,000 | |
Collectibility of the lease payments is reasonably assured, andthere are no lessor costs yet to be incurred. |
| Required: |
| 1. | How should this lease be classified by Mid-South UrologistsGroup and by Physicians' Leasing? |
| 2. | Prepare appropriate entries for both Mid-South Urologists Groupand Physicians' Leasing from the inception of the lease through thesecond rental payment on April 1, 2016. Depreciation is recorded atthe end of each fiscal year (December 31). (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field.) |
| Mid-South Urologists Group(Lessee): |
| Physicians' Leasing(Lessor): |
| 3. | Assume Mid-South Urologists Group leased the lithotripterdirectly from the manufacturer, Rand Medical, which produced themachine at a cost of $1.7 million. Prepare appropriate entries forRand Medical from the inception of the lease through the secondlease payment on April 1, 2016. (If no entry is requiredfor a particular transaction, select "No journal entry required" inthe first account field.) |
