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QUESTION

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

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 \$402,611 and has an expected useful life of six years. Its normal sales price is \$402,611. The lessee-guaranteed residual value at December 31, 2022, is \$20,000. Equal payments under the lease are \$110,000 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 11%. Western Soya knows the interest rate implicit in the lease payments is 9%. 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 tables provided.)

Required:

1. Show how Rhone-Metro calculated the \$110,000 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 n amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.

5. Prepare 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 \$1,200.

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