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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 $399,924 and has anexpected useful life of six years. Its normal sales price is$399,924. The lessee-guaranteed residual value at December 31,2020, is $18,000. Equal payments under the lease are $105,000 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 Soya’s incremental borrowing rate is 10%.Western Soya knows the interest rate implicit in the lease paymentsis 6%. Both companies use straight-line depreciation. Use (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 $105,000 annual leasepayments. (Enter your percentage answers as a wholenumber.)

Unguaranteed residual value

Table used?

n=

i=

Present Value

Amount to be recovered

amount to be recovered through periodic lease payments?

Lease Payments

Table used

n=

i=

Lease payments

Lease payments at the beginning of each of the four years?

Lease payments including executory costs

2. How should this lease be classified (a) byWestern Soya Co. (the lessee) and (b) by Rhone-Metro Industries(the lessor)?

Western Soya Co

Rhone-Metro Industries

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)

Record the lease (12/31/16)

Record the cash payment (12/31/16)

Rhone-Metro

Record the lease (12/31/16)

Record the cash received (12/31/16)

4.

Prepare an amortization schedules describing the pattern ofinterest over the lease term for the lessee and the lessor.


Lessee (unguarenteed residual value excluded

Lease Amortization Schedule

Dec31 2016-2019

Lessor (unguaranteed residual value included)

Lese Amortization Schedule

12/31/2016-2020

5.

Prepare the 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.)

record depreciation expense 12/31/17

record cash payment 12/31/17

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 Co.

record depreciation expense 12/31/2020

record the end of the lease 12/31/2020

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Lelia Lubowitz
Lelia LubowitzLv2
4 Apr 2019

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Werner Chemical, Inc., leased a protein analyzer on September30, 2016. The five-year lease agreement calls for Werner to makequarterly lease payments of $371,971, payable each September 30,December 31, March 31, June 30, with the first payment at September30, 2016. Werner's incremental borrowing rate is 12%. Depreciationis recorded on a straight-line basis at the end of each fiscalyear. The useful life of the equipment is five years. (FV of $1, PVof $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)(Use appropriate factor(s) from the tablesprovided.)

Required:
1.

Determine the present value of the lease payments at September30, 2016.

2. What amounts related to the lease wouldWerner report in its balance sheet at December 31, 2016 (ignoretaxes)?

liability:
assett:

3. What amounts related to the lease wouldWerner report in its income statement for the year ended December31, 2016 (ignore taxes)?

total expenses:

4.What amounts related to the lease wouldWerner report in its statement of cash flows for the year endedDecember 31, 2016 (ignore taxes)?

Capital Lease
Interest Portion
Principal Portion

You are the new controller for Moonlight Bay Resorts. Thecompany CFO has asked you to determine the company’s interestexpense for the year ended December 31, 2016. Your accounting groupprovided you the following information on the company's debt (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.)

1.

On July 1, 2016, Moonlight Bay issued bonds with a face amountof $1,500,000. The bonds mature in 15 years and interest of 11% ispayable semiannually on June 30 and December 31. The bonds wereissued at a price to yield investors 12%. Moonlight Bay recordsinterest at the effective rate.
2.

At December 31, 2015, Moonlight Bay had a 10% installment notepayable to Third Mercantile Bank with a balance of $620,000. Theannual payment is $120,000, payable each June 30.
3.

On January 1, 2016, Moonlight Bay leased a building under acapital lease calling for four annual lease payments of $45,000beginning January 1, 2016. Moonlight Bay’s incremental borrowingrate on the date of the lease was 10% and the lessor’s implicitrate, which was known by Moonlight Bay, was 9%.
Required:

Calculate interest expense for the year ended December 31,2016.

On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382.

The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motors’ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation.

Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Art’s incremental borrowing rate is 9%.

A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments.

Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)

Required:

1.

How should this lease be classified by Yard Art Landscaping (thelessee)?

2.

Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.)


3.How should this lease be classified by Branch Motors (thelessor)?

Operating lease

Capital lease: Sales-type lease

Capital lease

Capital lease: Direct financing lease


4.Show how Branch Motors calculated the $13,000 annual leasepayments.

Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value

Less:Present value of the residual value

Amount to be recovered through periodic lease payments

Lease payments at the beginning of each of the next fouryear

Add: Executory costs1,000Lease payments including executorycosts

5.

Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.)

6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount

·
1.

Record the lease for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the lease for Branch Motors.

· 4.

Record cash received by Branch Motors

7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art.

8.

Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors.


9.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2017. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field. Round your intermediate calculations to the nearestdollar amount.)

· 1.

Record the maintenance expense for Yard Art.

2.

Record the lease payment for Yard Art.

3.

Record the depreciation expense for Yard Art.

4.

Record the cash received on lease by Branch Motors.


10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the depreciation expense for Yard Art.

· 4.

Record the cash received on lease by Branch Motors.

11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the depreciation expense for Yard Art.

· 3.

Record the last payment on lease for Yard Art.

· 4.

Record the last cash receipt on lease and settlement of lease byBranch Motors.

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