Question

Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17,000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Western Soya’s incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation.

Rhone-Metro Industries manufactures equipment that is sold or leased on December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a four-year period ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $250,000 to manufacture and has an expected useful life of six years. Its normal sales price is $294,546. The expected residual value of $17.000 at December 31, 2025, is not guaranteed. Equal payments under the lease are $86,000 (including $6,000 maintenance costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Western Soya's incremental borrowing rate is 10%. Western Soya knows the interest rate implicit in the lease payments is 9% 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 tables provided.) Required: 1. Show how Rhone-Metro calculated the $86,000 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, 2021. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 (the second lease payment and amortization) 6. Prepare the appropriate entries for both Western Soya and Rhone- Metro on December 31, 2025, assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,200.

I need help answering the journal entries and Amortization schedule. I appreciate your help! Thank you!

Answer 1

XIA 5 2020-09(2) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H49 Х f A B C D E F G H J K L M 24 25 26 Year Remarks PV factor @ 8% 0 27 28 Less: 1 29 Lessee is known implicit rate of lessor. Discount rate is implicit rate. Answer: 1 Normal sales price $ 294,546 Present value of unguaranteed value (17000*0.70843) 12,043 Amount recover through annual lease payments $ 282,503 Divided : PV annuity factor @% for periods 3.53129 Annual lease payments excluding maintenance cost $ 80,000 Add: Annual maintenance costs $ 6,000 Annual lease payments $ 86,000 2 1.00000 0.91743 = 1 / 1.09 0.84168 = 0.91743 / 1.09 0.77218 = 0.84168/ 1.09 0.70843 = 0.77218 / 1.09 3 30 31 32 4 33 34 35 Total (0 to 3) 3.53129 36 Answer: 2 Western Soya Co. (the lessee) Rhone-Metro Industries (the lessor) Finance Lease Sales type lease with profit 37 38 39 40 Present value calculation 41 Western Soya Co. (the lessee) Amount Annual lease payments excluding main $ 80,000 Multiply: PV factor 3.53129 Present value 282,503 42 43 44 Present value for lessee $ 282,503 $ 294,546 96% 45 46 47 No No 48 49 | 50 If you meet any criteria of below, then considered as a finance lease, otherwise considered as an operating lease. Ownership criteria is ownership transferred to the lessee at the end of lease period? Specialized nature criteria is leased asset have special nature and which is no alternative use to the lessor? BPO criteria is it reasonably certain to exercise of bargain purchase pption? Lease term criteria is the lease period is equal to or more than 75% of the economic life of the leased asset? (4/6) Sheet120 Sheet121 Sheet122 Sheet123 Sheet124 Sheet125 Sheet126 Sheet127 CIRCULAR REFERENCES Search the web and Windows 0 No Activate Windows No Go to Settings to activate Windows, . READY 1 + + 100% 04:09 ENG IN 22-09-20

XIA 5 2020-09(2) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H61 : f А B D E F H J K L M 36 37 38 39 Western Soya Co. (the lessee) Finance Lease Rhone-Metro Industries (the lessor) Sales type lease with profit 40 Present value calculation 41 Western Soya Co. (the lessee) Amount Annual lease payments excluding main $ 80,000 Multiply: PV Present factor value 3.53129 282,503 42 43 44 Present value for lessee $ 282,503 $ 294,546 96% 45 46 47 No 48 No 49 If you meet any criteria of below, then considered as a finance lease, otherwise considered as an operating lease. Ownership criteria is ownership transferred to the lessee at the end of lease period? Specialized nature criteria is leased asset have special nature and which is no alternative use to the lessor? BPO criteria is it reasonably certain to exercise of bargain purchase option? Lease term criteria is the lease period is equal to or more than 75% of the economic life of the leased asset? (4/6) Present value criteria is the present value of payments equal to or more than 90% of the fair value of the leased asset? (282503/294546=96%) Type of Lease No 50 51 No Yes Finance Lease 52 53 54 55 Rhone-Metro Industries (the lessor) Normal sales price Less: Equipment cost Selling profit 56 $ 294,546 $ 250,000 $ 44,546 57 58 59 Fair value is more than lessor's original cost. This lease is considered for sales type lease with profit. Sales type lease with profit 60 61 62 Activate Windows Go to Settings to activate Windows. . Sheet120 Sheet121 Sheet122 Sheet123 Sheet124 Sheet125 Sheet126 Sheet127 READY CIRCULAR REFERENCES + + 100% 04:09 Search the web and Windows O ENG IN 22-09-20

XI 5 2020-09(2) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in G83 Rhone-Metro Industries (the lessor) A B D E F G H K L M 61 62 63 Answer: 4 Lease Amortization Schedule (Lessee) 64 65 66 67 68 Date Annual Lease Payment Dec 31, 2021 Dec 31, 2021 $ Dec 31, 2022 $ Dec 31, 2023 $ Dec 31, 2024 $ Reduction of Interest on Lease Lease Liability Liability Liability $ 282,503 80,000 $ 0 $ 80,000 $ 202,503 80,000 $ 18,225 $ 61,775 $ 140,728 80,000 $ 12,666 $ 67,334 $ 73,394 80,000 $ 6,606 $ 73,394 $ 0 69 70 71 72 73 74 75 76 77 78 79 Lease Amortization Schedule (Lessor) Interest on Recovery of Balance of Lease Lease Lease Date Annual Lease Payment Receivable Receivable Receivable Dec 31, 2021 $ 294,546 Dec 31, 2021 $ 80,000 $ 0 $ 80,000 $ 214,546 Dec 31, 2022 $ 80,000 $ 19,309 $ 60,691 $ 153,855 Dec 31, 2023 $ 80,000 $ 13,847 $ 66,153 $ 87,702 Dec 31, 2024 $ 80,000 $ 7,893 $ 72,107 $ 15,595 Dec 31, 2025 $ 17,000 $ 1,405 $ 15,595 $ PV of unguaranteed value (17000*0.70843) 12,043 Present value of unguaranteed residual value is deducted from cost of goods sold and sales revenue. Answer: 3 Answer: 3 Western Soya Co. (the lessee) Rhone-Metro Industries (the lessor) Date Accounts titles and explanation Debit Credit Nindows Date Accounts titles and explanation Debit Credit Sheet120 Sheet121 Sheet122 Sheet123 Sheet124 Sheet125 Sheet126 Sheet127 + Go to Settings to activate Windows. CIRCULAR REFERENCES 1 + + 100% ENG 04:09 Search the web and Windows O IN 22-09-20 80 81 82 83 84 READY

XIA 5 2020-09(2) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H105 А B с D E F G H J K L M 79 Dec 31, 2025 $ 17,000 $ 1,405 $ 15,595 $ 80 81 82 83 84 Credit Answer: 3 Western Soya Co. (the lessee) Date Accounts titles and explanation Dec 31, 2021 Right of use Asset $ Lease liability (To record the lease) Debit 282,503 PV of unguaranteed value (17000*0.70843) 12,043 Present value of unguaranteed residual value is deducted from cost of goods sold and sales revenue. Answer: 3 Rhone-Metro Industries (the lessor) Date Accounts titles and explanation Debit Credit Dec 31, 2021 Lease receivable , $ 294,546 Cost of goods sold (250000-12043) $ 237,957 Sales revenue (294546-12043) $ 282,503 Equipment $ 250,000 (To record lease agreement for sales type lease.) 85 86 87 $ 282,503 88 80,000 89 90 $ $ 6,000 Dec 31, 2021 Lease liability Prepaid maintenance expense Cash (To record lease payment.) 91 $ 86,000 $ 86,000 92 Dec 31, 2021 Cash Maintenance fees payable Lease receivable (To record lease receipt.) $ 6,000 $ 80,000 93 94 95 96 97 98 Credit 99 100 Answer: 5 Western Soya Co. (the lessee) Date Accounts titles and explanation Debit Dec 31, 2022 Amortization Expense $ 70,626 Right of use Asset (To record amortization expense.) (282503/4) 101 $ 70,626 102 Answer: 5 Rhone-Metro Industries (the lessor) Date Accounts titles and explanation Debit Credit Dec 31, 2022 Cash $ 86,000 Maintenance fees payable $ 6,000 Lease receivable $ 60,691 Interest revenue $ 19,309 (To record lease receipt.) Activate Windows Sheet127 Go to Settings to activate Windows. 103 104 105 106 $ 6,000 Dec 31, 2022 Maintenance expense $ 6,000 Prepaid maintenance expense To record expired maintenance expense Sheet120 Sheet121 Sheet122 Sheet123 Sheet124 CIRCULAR REFERENCES Sheet125 Sheet126 READY + + 100% 04:09 Search the web and Windows O ENG IN 22-09-20

XIA 5 2020-09(2) SEP.xlsx - Microsoft Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW DEVELOPER Sign in H124 : х foc А E F K L M 98 Credit Credit 99 100 B D Western Soya Co. (the lessee) Date Accounts titles and explanation Debit Dec 31, 2022 Amortization Expense $ 70,626 Right of use Asset (To record amortization expense.) (282503/4) G H Rhone-Metro Industries (the lessor) Date Accounts titles and explanation Debit Dec 31, 2022 Cash $ 86.000 Maintenance fees payable Lease receivable Interest revenue (To record lease receipt.) 101 $ 70,626 102 103 104 $ 6,000 $ 60,691 $ 19,309 6,000 105 Dec 31, 2022 Maintenance expense $ Prepaid maintenance expense To record expired maintenance expense $ 6,000 106 107 108 109 110 Dec 31, 2022 Interest expense Lease liability Prepaid maintenance expense Cash (To record lease payment.) $ $ $ 18,225 61,775 6,000 111 $ 86,000 112 113 114 115 116 117 Credit Credit Answer: 6 Western Soya Co. (the lessee) Date Accounts titles and explanation Dec 31, 2025 Amortization Expense $ Right of use Asset (To record amortization expense.) Debit 70,626 Answer: 6 Rhone-Metro Industries (the lessor) Date Accounts titles and explanation Debit Dec 31, 2025 Cash $ 17,000 Interest revenue Lease receivable (To record exercise BPO.) 118 $ 70,626 $ 1,405 $ 15,595 119 120 121 6,000 122 Dec 31, 2025 Maintenance expense $ Prepaid maintenance expense To record expired maintenance expense $ 6,000 123 124 125 Activate Windows Go to Settings to activate Windows. . Sheet120 Sheet121 Sheet122 Sheet123 Sheet124 Sheet125 Sheet126 Sheet127 READY CIRCULAR REFERENCES + + 100% 04:09 Search the web and Windows O ENG IN 22-09-20