On January 1, 2019, Cherry Inc. (CI), the seller-lessee, sold its office building to Rose Inc. (RI), the buyer-lessor, for $2,000,000 cash. On that date, CI also entered into a lease agreement with RI to rent the land and buildings for a 10-year period for $250,000 per year, payable on December 31 each year. Other pertinent information follows: The lease includes a clause in which CI must repurchase the land and buildings from RI at the end of the lease term for $2,400,000. The book value of the land and building at time of sale were $800,000 and $700,000, respectively. The remaining useful life of the building is 30 years. Its estimated residual value at that time is $0. The $2,000,000 sales price was the fair market value at the time of sale and the lease payment reflected market rents. The implicit rate in the lease is approximately 13.56% and CI knows this. Both companies year ends are December 31. Both companies only make accruals at year end. Required: Prepare the journal entries for the sale and lease for CI, the seller-lessee, at the commencement of the lease (January 1, 2019) and at December 31, 2019.

Im confused at to how to find the 4.2775% interest rate, and why the given implicit rate of 13.56% is not being used?

126 Question 9 Sales Leaseback - Not a sale (The seller/lessee has to buy back the property at the end of the lease) - 127 128 129 Cherry (Seller/Lessee) January 1, 2019: 130 2,000,000 131 132 Cash Financial Liability 2,000,000 133 December 31, 2019: PV 2,000,000 PMT 250,000 134 135 136 137 138 10 Years I/Y 4.2775% 139 85,550 ($ 2,000,000 x 4.2775%) Interest expense Finanial Liability 140 164,450 141 Cash 250,000 126 Question 9 Sales Leaseback - Not a sale (The seller/lessee has to buy back the property at the end of the lease) - 127 128 129 Cherry (Seller/Lessee) January 1, 2019: 130 2,000,000 131 132 Cash Financial Liability 2,000,000 133 December 31, 2019: PV 2,000,000 PMT 250,000 134 135 136 137 138 10 Years I/Y 4.2775% 139 85,550 ($ 2,000,000 x 4.2775%) Interest expense Finanial Liability 140 164,450 141 Cash 250,000