On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. • Its normal sales price is $494,424. • The lessee-guaranteed residual value on December 31, 2028, is $40,000. • Equal payments under the lease are $130,000 and are due on December 31 of each year. • The first payment was made on December 31, 2024. • Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.

On December 31, 2024, Rhone-Metro Industries leased equipment to Western Soya Company for a four-year period ending December 31, 2028, at which time possession of the leased asset will revert back to Rhone-Metro. • The equipment cost Rhone-Metro $494,424 and has an expected useful life of six years. • Its normal sales price is $494,424. • The lessee-guaranteed residual value on December 31, 2028, is $40,000. • Equal payments under the lease are $130,000 and are due on December 31 of each year. • The first payment was made on December 31, 2024. • Western Soya's incremental borrowing rate is 10%. • Western Soya knows the interest rate implicit in the lease payments is 8%. • Both companies use straight-line depreciation or amortization. Note: Use tables, Excel, or a financial calculator. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Show how Rhone-Metro calculated the $130,000 annual lease payments. 2. How should this lease be classified (a) by Western Soya Company (the lessee) and (b) by Rhone-Metro Industries (the lessor)? 3. Prepare the appropriate entries for both Western Soya Company and Rhone-Metro on December 31, 2024.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 11P

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