Exercise NO: 15

Assume that on January 1, 2014, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases the computer

Assume that on January 1, 2014, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases the computer system back. The relevant information is as follows.

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1. The computer was carried on Elmer’s books at a value of $600,000.

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2. The term of the noncancelable lease is 10 years; title will transfer to Elmer.

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3. The lease agreement requires equal rental payments of $110,666.81 at the end of each year.

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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%.

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5. The computer has a fair value of $680,000 on January 1, 2014, and an estimated economic life of 10 years.

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6. Elmer pays executory costs of $9,000 per year.

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Instructions

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Prepare the journal entries for both the lessee and the lessor for 2014 to reflect the sale and leaseback agreement. No uncertainties exist, and collectibility is reasonably certain.

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