Exercise 21A-23 Assume that on January 1, 2017, Elmers Restaurants sells a computer system to Wildhorse Finance Co. for $900,000 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 $820,000.

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 $670,000, all of which is unguaranteed.

3. The lease agreement requires equal rental payments of $113,390 at the beginning of each year.

4. The incremental borrowing rate for Elmer is 6%. Elmer is aware that Wildhorse Finance Co. set the annual rental to insure a rate of return of 6%.

5. The computer has a fair value of $900,000 on January 1, 2017, and an estimated economic life of 10 years.

Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale and leaseback agreement. (To record sale of equipment) (To record the lease) (To record lease liability)

Wildhorse 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)