Reference no: EM132581439

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 $453,627. The expected residual value of $29,000 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 $170,000 (including $6,000 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 11%. Both companies use straight-line amortization.

Question 1: Record transfer of equipment ownership in the books of lessee". The amount of the journal entry is not for $453,627. Why?