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Assume that on January 1, 2020, Elmers Restaurants sells a computer system to Blossom Finance Co. for $860,000 and immediately leases the computer system back.
Assume that on January 1, 2020, Elmers Restaurants sells a computer system to Blossom Finance Co. for $860,000 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 $780,000. | |
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 $630,000, all of which is unguaranteed. | |
3. | The lease agreement requires equal rental payments of $117,290 at the beginning of each year. | |
4. | The incremental borrowing rate for Elmer is 6%. Elmer is aware that Blossom Finance Co. set the annual rental to insure a rate 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 lessee and the lessor for 2020 to reflect the sale and leaseback agreement.
Debit Credit Date Account Titles and Explanation Elmer's Restaurants (Lessee) (To record sale of equipment) (To record the lease) (To record lease payment) Blossom 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)Step by Step Solution
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