Exercise 21-15 Your answer is partially correct. Try again. Assume that on January 1, 2017, Elmer's 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 Elmer's 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 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.) Click here to view factor tables Date Account Titles and Explanation Debit Credit Elmer's Restaurants (Lessee) 1/1/17 cash Equipment Unearned Profit on Sale-Leaseback (To record sale.) Leased Equipment Lease Liability (To record the lease.) Throughout 2017 Executory Costs Accounts Payable 12/31/17 Unearned Profit on Sale-Leaseback Depreciation Expense (To record amortization of profit on sale.) Depreciation Expense Accumulated Depreciation-Capital Leases (To record depreciation.) 716000 638000 716005 9900 7800 78000 716005 9900 7800 71600 71600 Interest Expense 71600 Lease Liability 44926 Cash (To record payment.) Liquidity Finance Co. (Lessor) 1/1/17 12/31/17 Equipment Cash (To record purchase.) Lease Receivable Equipment (To record the leaseback.) Cash Lease Receivable Interest Revenue 116526 716000 716000 716000 116526 716000 71600 44926