On December 31, 2016, Rhone-Metro Industries leased equipment to
Western Soya Co. for a four-year period ending December 31, 2020,
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,
2020, 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, 2016. Collectibility of the remaining lease payments
is reasonably assured, and Rhone-Metro has no material cost
uncertainties. 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 $1 and PVAD of $1)
(Use appropriate factor(s) from the tables
provided.)

Show how Rhone-Metro calculated the $160,000 annual lease
payments. (Enter your percentage answers as a whole
number.)

How should this lease be classified (a) by Western Soya Co. (the
lessee) and (b) by Rhone-Metro Industries (the lessor)?

Prepare the appropriate entries for both Western Soya Co. and
Rhone-Metro on December 31, 2016. (If no entry is required
for a transaction/event, select “No journal entry required” in the
first account field.)

Prepare an amortization schedule(s) describing the pattern of
interest over the lease term for the lessee and the lessor.

Prepare all appropriate entries for both Western Soya and
Rhone-Metro on December 31, 2017 (the second lease payment and
depreciation). (If no entry is required for a
transaction/event, select “No journal entry required” in the first
account field.)

Prepare the appropriate entries for both Western Soya and
Rhone-Metro on December 31, 2020 assuming the equipment is returned
to Rhone-Metro and the actual residual value on that date is
$1,500. (If no entry is required for a transaction/event,
select “No journal entry required” in the first account
field.)