Reference no: EM132936476
Rhone-Metro Industries manufactures equipment that is sold or leased. On December 31, 2021, Rhone-Metro leased equipment to Western Soya Co. for a noncancelable stated lease term of four years ending December 31, 2025, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost $400,000 to manufacture and has an expected useful life of six years. Its normal sales price is $457,779. The expected residual value of $28,000 at December 31, 2025, is not guaranteed. Western Soya Co. is reasonably certain to exercise a purchase option on December 30, 2024, at an option price of $12,000. Equal payments under the lease are $171,000 (including $4,000 annual 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 14%. Western Soya knows the interest rate implicit in the lease payments is 12%. Both companies use straight-line amortization.
Problem 1. Show how Rhone-Metro calculated the $171,000 annual lease payments.
Problem 2. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2021.
Problem 3. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
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