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Exercise 21-15 Assume that on January 1, 2014, Elmer\'s Restaurants sells a comp

ID: 2579425 • Letter: E

Question

Exercise 21-15 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 system back, The relevant information is as follows. 1. The computer was carried on Elmer's books at a value of $600,000. Mmmmmm 2. The term of the noncancelable lease is 10 years; title will transfer to Elmer 3. The lease agreement requires equal rental payments of $110,666.81 at the end of each year 4. The incremental borro ng rate for Einer is 12%, Elmer saware that Liquidity Finance Co set theannual rental 5. The computer has a fair value of $680,000 on January 1, 2014, and an estimated economic ife of 10 years 6. Elmer incurs executory costs of $9,000 per year. (Use Accounts Payable) to insure a rate of return 0,10%. Prepare the journal entries for both the lessee and the lessor for 2014 o reflect the sale leaseback agree en No uncertantes ens, and collect bit, s reason abl, certan·To record amort at n of profit on sale use Depreciation Expense account and not Sales Revenue account. (Credit account titles are automatically indented when anount is entered. Do not indent manually Round answers to o decimal places, e.g. 50,250)

Explanation / Answer

Elmerís Restaurants (Lessee)*

1/1/04 Cash DR............. 680,000.00

    Computer CR................ ...............................600,000.00

   Unearned Profit on Sale- Leaseback CR.........80,000.00

Leased Computer Under Capital

Leases DR ..........................................680,000.00

Lease Liability .........................................................680,000.00

($110,666.81 X 6.14457)

Throughout 2004

Executory Costs                               9,000.00

Accounts Payable or Cash                        9,000.00

12/31/04 Unearned Profit on Sale-

                                    Leaseback              8,000.00

                                      Depreciation Expense** 8,000.00

                                                   ($80,000 ˜ 10)

12/31/04 Depreciation Expense              68,000.00

Accumulated Depreciation              68,000.00

($680,000 ˜ 10)

Interest Expense                         68,000.00

Lease Liability                 42,666.81

Cash                                                          110,666.81

Liquidity Finance Co. (Lessor)*

1/1/04 Computer                     680,000.00

Cash                                           680,000.00

                              Lease Receivable         680,000.00

Computer                                  680,000.00

12/31/04 Cash                             110,666.81

Lease Receivable                                         42,666.81

Interest Revenue                                        68,000.00