Problem $15-22($Algo$)$ Purchase option reasonably certain to be exercised before lease term ends; nonlease payments; sales$-$type lease $[$LO$15-3,15-6,15-7]$

Rhone$-$Metro Industries manufactures equipment that is sold or leased. On December $31,2024,$ Rhone$-$Metro leased equipment to Western Soya Company for a noncancelable stated lease term of four years ending December $31,2028,$ at which time possession of the leased asset will revert back to Rhone$-$Metro.

The equipment cost $$300,000$ to manufacture and has an expected useful life of six years.

Its normal sales price is $$356,159.$

The expected residual value of $$15,000$ on December $31,2028,$ is not guaranteed.

Western Soya Company is reasonably certain to exercise a purchase option on December $30,2027,$ at an option price of $$8,000.$

Equal payments under the lease are $$132,000($including $$4,000$ annual maintenance costs$)$ 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 $12\%.$

Western Soya knows the interest rate implicit in the lease payments is $10\%.$ Both companies use straight$-$line depreciation or amortization.

$[$Hint: A lease term ends for accounting purposes when an option becomes exercisable if it$$s expected to be exercised $($i$.$e$.,$ a BPO$).]$

Note: Use tables, Excel, or a financial calculator. $($FV of $$1,$ PV of $$1,$ FVA of $$1,$ PVA of $$1,$ FVAD of $$1$ and PVAD of $$1)$

Required:

Show how Rhone$-$Metro calculated the $$132,000$ annual lease payments.

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

Prepare the appropriate entries for both Western Soya Company and Rhone$-$Metro on December $31,2024.$

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

Prepare the appropriate entries for both Western Soya and Rhone$-$Metro on December $31,2025($the second rent payment and amortization$).$

Prepare the appropriate entries for both Western Soya and Rhone$-$Metro on December $30,2027,$ assuming the purchase option is exercised on that date.