Assume that on January 1, 2020, 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.

1.		The computer was carried on Elmer’s books at a value of $600,000.
2.		The term of the non-cancelable lease is 3 years; title will not transfer to Elmer’s, and the expected residual value at the end of the lease is $450,000, all of which is unguaranteed.
3.		The lease agreement requires equal rental payments of $115,970 at the beginning of each year.
4.		The incremental borrowing rate for Elmer is 8%. Elmer is aware that Liquidity Finance Co. set the annual rental to insure a rate of return of 8%.
5.		The computer has a fair value of $680,000 on January 1, 2020, and an estimated economic life of 10 years.

Prepare the journal entries for both the lessee and the lessor for 2020 to reflect the sale and leaseback agreement. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

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Date	Account Titles and Explanation	Debit	Credit
Elmer’s Restaurants (Lessee)
1/1/20Throughout 202012/31/20
	(To record sale of equipment)
1/1/20Throughout 202012/31/20
	(To record the lease)
1/1/20Throughout 202012/31/20
	(To record lease payment)
1/1/20Throughout 202012/31/20
Liquidity Finance Co. (Lessor)
1/1/20Throughout 202012/31/20
	(To record purchase of equipment)
1/1/20Throughout 202012/31/20
	(To record the leaseback)
1/1/20Throughout 202012/31/20
	(To record the recognition of the revenue)
1/1/20Throughout 202012/31/20
	(To record depreciation expense on the leased equipment)

Answer rating: 100% (QA)

Present value of Annuity due 8 for 3 years 278326 Date Elmers Restaurants Lessee 112020 Ca... View the full answer