Question - Assume that on January 1, 2017, 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, 2017, and an estimated economic life of 10 years.
Prepare the journal entries for both the lessee and the lessor for 2017 to reflect the sale and leaseback agreement.