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.

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 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 $680,000 on January 1, 2014, and an estimated economic life of 10 years.

6. Elmer pays executory costs of $9,000 per year.

Instructions

Prepare the journal entries for both the lessee and the lessor for 2014 to reflect the sale and leaseback agreement. No uncertainties exist, and collectibility is reasonably certain.