Question
Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Blossom Finance Co. for $820,000 and immediately leases the computer system back.
Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Blossom Finance Co. for $820,000 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 $740,000. | |
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 $590,000, all of which is unguaranteed. | |
3. | The lease agreement requires equal rental payments of $113,690 at the beginning of each year. | |
4. | The incremental borrowing rate for Elmer is 7%. Elmer is aware that Blossom Finance Co. set the annual rental to insure a rate of return of 7%. | |
5. | The computer has a fair value of $820,000 on January 1, 2017, and an estimated economic life of 10 years. |
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