Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Oriole Finance Co. for $900,000 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 $820,000. 2. 3. 4. 5. 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 $670,000, all of which is unguaranteed. The lease agreement requires equal rental payments of $116,690 at the beginning of each year. The incremental borrowing rate for Elmer is 8%. Elmer is aware that Oriole Finance Co. set the annual rental to insure a rate of return of 8%. The computer has a fair value of $900,000 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.) Click here to view factor tables.
Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Oriole Finance Co. for $900,000 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 $820,000. 2. 3. 4. 5. 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 $670,000, all of which is unguaranteed. The lease agreement requires equal rental payments of $116,690 at the beginning of each year. The incremental borrowing rate for Elmer is 8%. Elmer is aware that Oriole Finance Co. set the annual rental to insure a rate of return of 8%. The computer has a fair value of $900,000 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.) Click here to view factor tables.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
am. 117.
Transcribed Image Text:Assume that on January 1, 2020, Elmer's Restaurants sells a computer system to Oriole Finance Co. for $900,000 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 $820,000.
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 $670,000, all of which is unguaranteed.
3.
The lease agreement requires equal rental payments of $116,690 at the beginning of each year.
4.
The incremental borrowing rate for Elmer is 8%. Elmer is aware that Oriole Finance Co. set the annual rental to insure a rate
of return of 8%.
5.
The computer has a fair value of $900,000 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.)
Click here to view factor tables.
Date
Account Titles and Explanation
Elmer's Restaurants (Lessee)
Debit
Credit
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