On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co

Question

On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $578,386 and has an expected useful life of six years. Its normal sales price is $578,386. The lessee-guaranteed residual value at December 31, 2022, is $30,000. Equal payments under the lease are $160,000 and are due on December 31 of each year. The first payment was made on December 31, 2018. western Soya's incremental borrowing rate is 12%. Western Soya knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation. Use (FV of$1, PV of $1. FVA of $1, PVA of $1, FVAD Of S1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Show how Rhone-Metro calculated the $160,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2018 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, 2019 (the second lease payment and depreciation) 6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500.

Explanation / Answer

As per policy only first four questions will be answered

Required 1

* present value of $1: n=4, i=10%

** present value of an annuity due of $1: n=4, i=10%

Required 2

This is a capital lease to Western Soya Co. because the present value of the minimum lease payments equal to or greater than 90% of the fair value of the asset.

This is a direct financing lease to Rheno-Metro industries because the fair value equals the lessors carrying value, there is no dealers profit.

Required 3

Lessee

Lessor

Required 4

Lessor

Lease Amortization Schedule

160000

418386

(578386-160000)

41839

(418386*10%)

118161

(160000-47623)

300225

(418386-118161)

30023

(300225*10%)

129977

(160000-30023)

170248

(300225-129977)

17025

(170248*10%)

142975

(160000-24023)

27273

(170248-142975)

2727

(27273*10%)

27273

(30000-2727)

Lessee

Lease Amortization Schedule

Guarteneed residual value Table or calculator function: PVIF n= 4 i= 10% Present value Amount to be recovered 578386 Present value of the guaranteed (30000 × 0.68031*) (20490) Amount to be recovered through lease payments 557896 Lease payments Table or calculator function : PVIFA n= 4 i= 10% Lease payments Lease payments at the beginning of each of next four years (557896÷3.48685**) 160,000

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