Exercise 21-15

Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Liquidity Finance Co. for $651,000 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 $576,000.

2. The term of the noncancelable lease is 10 years; title will transfer to Elmer.

3. The lease agreement requires equal rental payments of $105,947 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 $651,000 on January 1, 2017, and an estimated economic life of 10 years.

6. Elmer incurs executory costs of $8,400 per year. (Use Accounts Payable)

Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale-leaseback agreement. No uncertainties exist, and collectibility is reasonably certain. To record amortization of profit on sale use Depreciation Expense account and not Sales Revenue account.

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Debit Credit Date Account Titles and Explanation Elmer's Restaurants (Lessee) To record sale.) (To record the lease.)