Question

Assume that on January 1, 2017, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $683,000 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.

2. The term of the noncancelable lease is 10 years; title will transfer to Elmer.

3. The lease agreement requires equal rental payments of $111,155 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 $683,000 on January 1, 2017, and an estimated economic life of 10 years.

6. Elmer incurs executory costs of $8,700 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

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.

Answer 1

Elmer's Restaurants Elmer Restaurant (lessee): Journal Enteries Date Particulars Debit in $ Credit in 1.1.2017 Cash a/c Dr. 683000 To Equipment 600000 To Unearned Profit on Sale -Lease back 83000 (Equipment Purchased) Leased Equipment a/c 1.1.2017 Dr. 683000 To Lease Liability 683000 (Lease liability recorded) 111155 x 6.144573 683000 Executory Costs a/c Dr 8700 To Accounts Payable 8700 (Executory costs payable) 31.12.2017 Depreciation Expense a/c Dr 68300 Unearned profit on sale-leaseback a/c Dr 8300 To Accumulated Depreciation Capital Leases 76600 (Depreciation charged on Equipment) ($683,000 10) (83,000 10) 31.12.2017 Interest Expense a/c Lease Liability a/c Dr. 68300 Dr. 42855 To Cash 111155 To record lease payment) Liquidity Finance Co.(lessor): 1.1.2017 Equipment a/c Dr 683000 To Cash 683000 (Equipment purchased for cash) Lease Receivable a/c Dr. 683000 To Equipment 683000 To record lease back 31.12.2017 Cash a/c Dr. 111155 To Lease Receivable 42855 To Interest Revenue 68300 (Lease Payments received)

Partial Lease Amortization Schedule Annual Date Lease Payment Interest (10%) Balance 1.1.2017 683000 111155 42855 640145 31.12.2017