Rhone-Metro Industries manufactures equipment that is sold orleased. On December 31, 2016, Rhone-Metro leased equipment toWestern Soya Co. for a noncancelable stated lease term of fouryears ending December 31, 2020, at which time possession of theleased asset will revert back to Rhone-Metro. The equipment cost$300,000 to manufacture and has an expected useful life of sixyears. Its normal sales price is $365,760. The expected residualvalue of $25,000 at December 31, 2020, is not guaranteed. WesternSoya Co. can exercise a bargain purchase option on December 30,2019, at an option price of $10,000. Equal payments under the leaseare $134,960 (including $4,000 annual executory costs) and are dueon December 31 of each year. The first payment was made on December31, 2016. Collectibility of the remaining lease payments isreasonably 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. Hint: Alease term ends for accounting purposes when an option becomesexercisable if itâs expected to be exercised (i.e., a BPO). (FV of$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Useappropriate factor(s) from the tables provided.) Required: 1. Showhow Rhone-Metro calculated the $134,960 annual lease payments. 2.How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Preparethe appropriate entries for both Western Soya Co. and Rhone-Metroon December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.) Western Soya Co. (Lessee): Rhone-Metro(Lessor):Rhone-Metro(Lessor): 4. Prepare an amortization schedule(s)describing the pattern of interest over the lease term for thelessee and the lessor. Lessee and lessor (BPO included): 5. Preparethe appropriate entries for both Western Soya and Rhone-Metro onDecember 31, 2017 (the second rent payment and depreciation). ((Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field.) Western Soya Co.(Lessee): Rhone-Metro(Lessor): 6. Prepare the appropriate entriesfor both Western Soya and Rhone-Metro on December 30, 2019,assuming the BPO is exercised on that date. (If no entry isrequired for a transaction/event, select "No journal entryrequired" in the first account field.) Western Soya Co. (Lessee):Rhone-Metro(Lessor):
Rhone-Metro Industries manufactures equipment that is sold orleased. On December 31, 2016, Rhone-Metro leased equipment toWestern Soya Co. for a noncancelable stated lease term of fouryears ending December 31, 2020, at which time possession of theleased asset will revert back to Rhone-Metro. The equipment cost$300,000 to manufacture and has an expected useful life of sixyears. Its normal sales price is $365,760. The expected residualvalue of $25,000 at December 31, 2020, is not guaranteed. WesternSoya Co. can exercise a bargain purchase option on December 30,2019, at an option price of $10,000. Equal payments under the leaseare $134,960 (including $4,000 annual executory costs) and are dueon December 31 of each year. The first payment was made on December31, 2016. Collectibility of the remaining lease payments isreasonably 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. Hint: Alease term ends for accounting purposes when an option becomesexercisable if itâs expected to be exercised (i.e., a BPO). (FV of$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Useappropriate factor(s) from the tables provided.) Required: 1. Showhow Rhone-Metro calculated the $134,960 annual lease payments. 2.How should this lease be classified (a) by Western Soya Co. (thelessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Preparethe appropriate entries for both Western Soya Co. and Rhone-Metroon December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.) Western Soya Co. (Lessee): Rhone-Metro(Lessor):Rhone-Metro(Lessor): 4. Prepare an amortization schedule(s)describing the pattern of interest over the lease term for thelessee and the lessor. Lessee and lessor (BPO included): 5. Preparethe appropriate entries for both Western Soya and Rhone-Metro onDecember 31, 2017 (the second rent payment and depreciation). ((Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field.) Western Soya Co.(Lessee): Rhone-Metro(Lessor): 6. Prepare the appropriate entriesfor both Western Soya and Rhone-Metro on December 30, 2019,assuming the BPO is exercised on that date. (If no entry isrequired for a transaction/event, select "No journal entryrequired" in the first account field.) Western Soya Co. (Lessee):Rhone-Metro(Lessor):
Related questions
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) |
