On January 1, 2020, Hershey Corporation sells equipment to Capital Finance Corp. for $570,000 and immediately leases the equipment back. Both Hershey and Capital use

ASPE. Other relevant information is as follows.

1. The equipments carrying value on Hersheys books on January 1, 2020, is $510,000.

2. The term of the non-cancellable lease is 9 years. Title will transfer to Hershey at the end of the lease.

3. The lease agreement requires equal rental payments of $95, 075.31 at the end of each year.

4. The incremental borrowing rate of Hershey Corporation is 10%. Hershey is aware that Capital Finance Corp. set the annual rental to ensure a rate of return of 9%, the implicit rate.

5. The equipment has a fair value of $570,000 on January 1, 2020, and an estimated economic life of 9 years, with no residual value.

6. Hershey pays executory costs of $9,750 per year directly to appropriate third parties.

Required

(a) Prepare the journal entries for both the lessee and the lessor for 2020 to reflect the sale and leaseback agreement. No uncertainties exist and collectability is reasonably certain.

(b) What is Hersheys primary objective in entering a sale-leaseback arrangement with Capital Finance Corp.? Would you consider this transaction to be a red flag to creditors, demonstrating that Hershey is in financial difficulty?