Assume that on January 1, 20x7, Second Bank sells a computer system to General Finance Co. for $450,000 and immediately leases back the computer system under the following lease provisions:

1. The computer was carried on Second Bank's books at a value of $350,000.

2. The term of the noncancelable lease is 3 years; title will not transfer to Second Bank; and the expected residual value at the end of the lease is $250,000, all of which is unguaranteed.

3. Equal rental payments of $84,738 at the beginning of each year.

4. The incremental borrowing rate for Second Bank is 6%. Second Bank is aware that General Finance set the annual rental to ensure an implicit rate of 6%.

5. The computer has a fair value of $450,000 on January 1, 20x7, and an estimated economic life of 10 years, and no estimated residual value

Instructions:

(Round all calculations to the nearest dollar.)

Both the lessee and the lessor's accounting periods end on December 31.

a. Discuss the nature of this lease arrangement and the accounting method that each party to the lease should apply. Has a "sale" occurred?

b. Prepare both a liability amortization schedule and an asset amortization schedule for the seller-lessee.

c. Prepare the journal entries for both Second Bank and General Finance Co. during 2017 to reflect the sale and leaseback.