Exercise 21-15 Assume that on January 1, 2014, Elmer\'s Restaurants sells a comp
ID: 2579425 • Letter: E
Question
Exercise 21-15 Assume that on January 1, 2014, Elmer's Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases the computer system back, The relevant information is as follows. 1. The computer was carried on Elmer's books at a value of $600,000. Mmmmmm 2. The term of the noncancelable lease is 10 years; title will transfer to Elmer 3. The lease agreement requires equal rental payments of $110,666.81 at the end of each year 4. The incremental borro ng rate for Einer is 12%, Elmer saware that Liquidity Finance Co set theannual rental 5. The computer has a fair value of $680,000 on January 1, 2014, and an estimated economic ife of 10 years 6. Elmer incurs executory costs of $9,000 per year. (Use Accounts Payable) to insure a rate of return 0,10%. Prepare the journal entries for both the lessee and the lessor for 2014 o reflect the sale leaseback agree en No uncertantes ens, and collect bit, s reason abl, certan·To record amort at n of profit on sale use Depreciation Expense account and not Sales Revenue account. (Credit account titles are automatically indented when anount is entered. Do not indent manually Round answers to o decimal places, e.g. 50,250)Explanation / Answer
Elmerís Restaurants (Lessee)*
1/1/04 Cash DR............. 680,000.00
Computer CR................ ...............................600,000.00
Unearned Profit on Sale- Leaseback CR.........80,000.00
Leased Computer Under Capital
Leases DR ..........................................680,000.00
Lease Liability .........................................................680,000.00
($110,666.81 X 6.14457)
Throughout 2004
Executory Costs 9,000.00
Accounts Payable or Cash 9,000.00
12/31/04 Unearned Profit on Sale-
Leaseback 8,000.00
Depreciation Expense** 8,000.00
($80,000 ˜ 10)
12/31/04 Depreciation Expense 68,000.00
Accumulated Depreciation 68,000.00
($680,000 ˜ 10)
Interest Expense 68,000.00
Lease Liability 42,666.81
Cash 110,666.81
Liquidity Finance Co. (Lessor)*
1/1/04 Computer 680,000.00
Cash 680,000.00
Lease Receivable 680,000.00
Computer 680,000.00
12/31/04 Cash 110,666.81
Lease Receivable 42,666.81
Interest Revenue 68,000.00
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