Assume that on January 1, 2017, Elmer's Restaurants sells a computer system to Crane Finance Co. for $640,000 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 $560,000. 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 $410,000, all of which is unguaranteed. 3. 4. The lease agreement requires equal rental payments of $117,590 at the beginning of each year. The incremental borrowing rate for Elmer is 5%. Elmer is aware that Crane Finance Co. set the annual rental to insure a rate of return of 5%. 5. The computer has a fair value of $640,000 on January 1, 2017, and an estimated economic life of 10 years.
Assume that on January 1, 2017, Elmer's Restaurants sells a computer system to Crane Finance Co. for $640,000 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 $560,000. 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 $410,000, all of which is unguaranteed. 3. 4. The lease agreement requires equal rental payments of $117,590 at the beginning of each year. The incremental borrowing rate for Elmer is 5%. Elmer is aware that Crane Finance Co. set the annual rental to insure a rate of return of 5%. 5. The computer has a fair value of $640,000 on January 1, 2017, and an estimated economic life of 10 years.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Assume that on January 1, 2017, Elmer's Restaurants sells a computer system to Crane Finance Co. for $640,000 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 $560,000.
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 $410,000, all of which is unguaranteed.
The lease agreement requires equal rental payments of $117,590 at the beginning of each year.
The incremental borrowing rate for Elmer is 5%. Elmer is aware that Crane Finance Co. set the annual rental to
insure a rate of return of 5%.
5. The computer has a fair value of $640,000 on January 1, 2017, and an estimated economic life of 10 years.
3.
4.
Prepare the journal entries for both the lessee and the lessor for 2017 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.)
Click here to view the factor table.
Date
Account Titles and Explanation
Elmer's Restaurants (Lessee)
(To record sale of equipment)
(To record the lease)
(To record lease liability)
Debit
Credit
Transcribed Image Text:Crane Finance Co. (Lessor).
(To record purchase of equipment)
(To record the leaseback)
(To record the recognition of the revenue)
(To record depreciation expense on the leased equipment)
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