Question

Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Ivanhoe Finance Car for Information is as follows mediately leaves the computer system back. The relevant 1. The computer was carried on Elmer's books at a value of $780,000 2. 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 $630,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $117,890 at the beginning of each year. 4. The incremental borrowing rate for Elmer is 6X Elmer is aware that Ivanhoe Finance Co set the annual rental to insure arate of return of 6% 5. The computer has a fair value of $860,000 on January 1, 2020, and an estimated economic life of 10 years Prepare the journal entries for both the leve and the lessor for 2020 to reflect the sale and leaseback agreement. (For calculation purposes, use decimal places as displayed in the factor toble provided and round answers to decimal places . 5.275. Credit account titles are automatically indented when amount is entered. Do not indent manually Record journal entries in the order presented in the problem.) Click here to view factor tables Debit Credit Date Account Titles and Explanation Elmer's Restaurants Lessee) (To record sale of equipment) (To record the lease) (To record lease payment)

Answer 1

Elmer's Restaurants Elmer's Restaurants (Lessee)* Journal Enteries Date Particulars 1.1.2020 Cash a/c To Equipment To Unearned Profit on Sale - Leaseback Dr. Debit in $ Credit in $ 860000 780000 80000 Dr. 867680 Leased Equipment a/c To Lease Liability ($117,890 X 7.294936) 867680 8000 31.12.2020 Unearned Profit on Sale - Leaseback a/c Dr. To Depreciation Expense ($80,000 = 10) 8000 86000 31.12.2020 Depreciation Expense a/c Dr. To Accum. Depre - Capital Lease ($860,000 = 10) 86000 Dr. Dr. 51600 66290 Interest Expense a/c Lease Liability a/c To Cash 860000 x 6% = 51600 117890 Liquidity Finance Co. (Lessor)* Date 1.1.2020 Particulars Equipment a/c To Cash Dr. Debit in $ Credit in $ 860000 860000 Dr. 860000 Lease Receivable a/c To Equipment 860000 117890 31.12.2020 Cash a/c Dr. To Lease Receivable To Interest Revenue 66290 51600

Date 1.1.2020 31.12.2020 Lease Payment Interest (6%) Amortization Balance 860000 117890 51600 662907 93710