Question

Assume that on January 1, 2017, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $733,000 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 $657,000.
2.		The term of the noncancelable lease is 10 years; title will transfer to Elmer.
3.		The lease agreement requires equal rental payments of $119,292 at the end of each year.
4.		The incremental borrowing rate for Elmer is 12%. Elmer is aware that Liquidity Finance Co. set the annual rental to insure a rate of return of 10%.
5.		The computer has a fair value of $733,000 on January 1, 2017, and an estimated economic life of 10 years.
6.		Elmer incurs executory costs of $9,100 per year. (Use Accounts Payable)

Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale-leaseback agreement. No uncertainties exist, and collectibility is reasonably certain. To record amortization of profit on sale use Depreciation Expense account and not Sales Revenue account. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 50,250.)

Debit Credit Date Account Titles and Explanation Elmer's Restaurants (Lessee) (To record sale.) (To record the lease.) (To record amortization of profit on sale.) (To record depreciation.)

Answer 1

Gedet 657000 76000 solution Elmers Restaurant: - Date I particularz 'Debit of-01-17 Cash al or 733000 To equipment To unerealized profit on sale - Lease book [Being to record the sale] Lease equipment al Dr. To Laye Bale+ [Being to record the hease] 733000 733000 9100 2017 Executory coste To accounts payable 9100 12-31-17 7600 7600 12-31-17 73300 Unrealized poroght on Sale - Lease back To Depreciation expense [ 76000/10) { Being to record depreciation] Depreciation experse To accinulated dep- Capital hease ( 733000/10] [ being to grecord the deprelation] Interest expense Lease Leability To cash Being to record the payment] 43300 73300 45992 19292

Liquidity Date Debit Gedet al-1-17 Finance : particular equipment als Dr To cash [Being to record purchase 733000 733000 ]

12-31-17 119292 Cash To Lease vreceivables 45992 To Interest revenue 73300