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 $618,739 and has an expected useful life of six years. Its normal sales price is $618,739. The lessee-guaranteed residual value at December 31, 2020, is $26,000. Equal payments under the lease are $170,000 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 Soyaâs incremental borrowing rate is 10%. 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)
1. Show how Rhone-Metro calculated the $170,000 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, 2016
4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
5. Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2017 (the second lease payment and depreciation).
6. 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 $1,200.
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 $618,739 and has an expected useful life of six years. Its normal sales price is $618,739. The lessee-guaranteed residual value at December 31, 2020, is $26,000. Equal payments under the lease are $170,000 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 Soyaâs incremental borrowing rate is 10%. 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)
| 1. Show how Rhone-Metro calculated the $170,000 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, 2016
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Related questions
Problem 15-16 Lessee-guaranteed residual value; third-party guaranteed residual value; unguaranteed residual value; executory costs; different interest rates for lessor and lessee [LO15-3, 15-5, 15-8, 15-9]
| On December 31, 2013, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $35,000 for the truck. Its retail value is $59,816. |
| The lease agreement specified annual payments of $17,000 beginning December 31, 2013, the inception of the lease, and at each December 31 through 2016. Branch Motorsâ interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2017) the truck was expected to be worth $11,000. The estimated useful life of the truck is five years with no salvage value. Both companies use straight-line depreciation. |
| Yard Art guaranteed a residual value of $4,000. Guarantor Assurance Corporation was engaged to guarantee a residual value of $7,000, but with a deductible equal to any amount paid by the lessee ($7,000 reduced by any amount paid by the lessee). Yard Artâs incremental borrowing rate is 9%. |
| A $2,000 per year maintenance agreement was arranged for the truck with an outside service firm. As an expediency, Branch Motors agreed to pay this fee. It is, however, reflected in the $17,000 lease payments. |
| Collectibility of the lease payments by Yard Art is reasonably predictable and there are no costs to the lessor that are yet to be incurred. (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. | How should this lease be classified by Yard Art Landscaping (the lessee)? | ||||||||
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| 2. | Calculate the amount Yard Art Landscaping would record as a leased asset and a lease liability.(Round your intermediate calculations to the nearest dollar amount.) |
| 3. | How should this lease be classified by Branch Motors (the lessor)? |
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| 4. | Show how Branch Motors calculated the $17,000 annual lease payments. |
| 5. | Calculate the amount Branch Motors would record as sales revenue. (Round your intermediate calculations to the nearest dollar amount.) |
| 6. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 7. | Prepare an amortization schedule that describes the pattern of interest expense over the lease term for Yard Art. |
| 8. | Prepare an amortization schedule that describes the pattern of interest revenue over the lease term for Branch Motors. |
| 9. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 10. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2016 (the final lease payment). (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
| 11. | Prepare the appropriate entries for both Yard Art and Branch Motors on December 31, 2017 (the end of the lease term), assuming the truck is returned to the lessor and the actual residual value of the truck was $2,000 on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round your intermediate calculations to the nearest dollar amount. Enter your answers in whole dollars.) |
Problem 15-15 Sales-type lease; bargain purchase option exercisable before lease term ends; lessor and lessee [LO15-3, 15-5, 15-6, 15-7, 15-8]
| Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying and requires an interest rate implicit in the lease that is one percent below alternate methods of financing. On September 30, 2013, the company leased a delivery truck to a local florist, Anything Grows. |
| The lease agreement specified quarterly payments of $5,500 beginning September 30, 2013, the inception of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2016 (three-year lease term). The florist had the option to purchase the truck on September 29, 2015, for $11,000 when it was expected to have a residual value of $18,000. The estimated useful life of the truck is four years. Mid-South Auto Leasingâs quarterly interest rate for determining payments was 3% (approximately 12% annually). Mid-South paid $41,000 for the truck. Both companies use straight-line depreciation. Anything Growsâ incremental interest rate is 12%. |
| Hint: A lease term ends for accounting purposes when an option becomes exercisable if itâs expected to be exercised (i.e., a BPO). (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. | Calculate the amount of dealerâs profit that Mid-South would recognize in this sales-type lease. (Be careful to note that, although payments occur on the last calendar day of each quarter, since the first payment was at the inception of the lease, payments represent an annuity due.) |
| 2. | Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 3. | Prepare an amortization schedule(s) describing the pattern of interest expense for Anything Grows and interest revenue for Mid-South Auto Leasing over the lease term. (Enter your answers in whole dollars.) |
| 4. | Prepare the appropriate entries for Anything Grows and Mid-South Auto Leasing on December 31, 2013.(If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 5. | Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2015, assuming the bargain purchase option was exercised on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
