E21-23 (LO5) (Sale-Leaseback) Assume that on January 1, 2017, Elmer\'s Restauran

Question

E21-23 (LO5) (Sale-Leaseback) Assume that on January 1, 2017, Elmer's Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases back the computer system. The relevant information is as follows. The computer was carried on Elmer's books at a value of $600,000. The term of the non-cancelable lease is 3 years; title will not transfer to Elmer's, and the expected residual value at the end of the lease is $450,000, all of which is unguaranteed. 1. 2. 3. The lease agreement requires equal rental payments of $115,970 at the beginning of each year. 4. The incremental borrowing rate for Elmer's is 8%. Elmer's is aware that Liquidity Finance set the annual rental to ensure a rate of return of 8%. 5. The computer has a fair value of $680,000 on January 1, 2017, and an estimated economic life of 10 years. Instructions Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale and leaseback agreement.

Explanation / Answer

Lease is operating lease as title or risk/reward has not been transferred:

Elmer's (Lessee) Debit Credit 01-01-2017 Cash 600000 Equuipment 680000 Unearned profit on sale 80000 (Sale of equipment) 01-01-2017 Rent Expense 115970 Cash 115970 (Lease back) Lessor: 01-01-2017 Equipment 680000 Cash 680000 (equipment buy) 01-01-2017 Cash 115970 Rent Revenue 115970 31-12-2017 Depreciation Exp 68000 Accumulated Depreciation 68000 (680000/10)

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.