Exercise 21-15

Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Liquidity Finance Co. for $716,000 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 $638,000.
2.		The term of the noncancelable lease is 10 years; title will transfer to Elmer.
3.		The lease agreement requires equal rental payments of $116,526 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 $716,000 on January 1, 2017, and an estimated economic life of 10 years.
6.		Elmer incurs executory costs of $9,900 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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 50,250.)

Date Account Titles and Explanation Elmer's Restaurants (Lessee) To record sale.) To record the lease.) (To record amortization of profit on sale.) (To record depreciation.) (To record payment.) Liquidity Finance Co. (Lessor) (To record purchase.) (To record the leaseback.) Click if you would like to Show Work for this question: Open Show Work