Question
Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Sheridan Finance Co. for $840,000 and immediately leases the computer system back.
Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Sheridan Finance Co. for $840,000 and immediately leases the computer system back. The relevant information is as follows.
1. | The computer was carried on Elmers books at a value of $760,000. | |
2. | The term of the non-cancelable lease is 3 years; title will not transfer to Elmers, and the expected residual value at the end of the lease is $610,000, all of which is unguaranteed. | |
3. | The lease agreement requires equal rental payments of $113,990 at the beginning of each year. | |
4. | The incremental borrowing rate for Elmer is 8%. Elmer is aware that Sheridan Finance Co. set the annual rental to insure a rate of return of 8%. | |
5. | The computer has a fair value of $840,000 on January 1, 2017, and an estimated economic life of 10 years. |
Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale and leaseback agreement. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Click here to view the factor table.
Date | Account Titles and Explanation | Debit | Credit |
Elmers Restaurants (Lessee) | |||
(To record sale of equipment) | |||
(To record the lease) | |||
(To record lease liability) | |||
Sheridan Finance Co. (Lessor) | |||
(To record purchase of equipment) | |||
(To record the leaseback) | |||
(To record the recognition of the revenue) | |||
(To record depreciation expense on the leased equipment) |
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