Question

Please assist with answering the correct Account titles and figures in red! Please show all work! Thank you!

Your answer is partially correct. Try again 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. The computer was carried on Elmer's books at a value of $560,000 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%. The computer has a fair value of $640,000 on January 1, 2017, and an estimated economic life of 10 years. 1. 2. 3. 4· 5. 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.) r table Date Account Titles and Explanation Debit Credit Imer's Restaurants (Lessee) Cash 640000 Equipment 560000 Gain on Sale of Equipment 80000 To record sale of equipment) Right-of-Use Asset 336238 Lease Liability 336238 To record the lease) Lease Expense 64000 Lease Liability 64000 To record lease liability) 12/31/17 Depreciation Expense Lease Liability Crane Finance Co. (Lessor) ▼ | Equipment act 640000 (To record purchase of equipment) Lease Liability 64000 Lease Liability 64000 (To record the leaseback) Cash 117590 Lease Revenue 117590 (To record the recognition of the revenue) Depreciation Expense 64000 (To record depreciation expense on the leased equipment) AVAILABLE ACCOUNT TITLES: Lease Expense Cash Lease Revenue Accumulated Depreciation-Equipment Equipment Rent Expense Depreciation Expense Lease Liability Right-of-Use Asset Unearned Lease Revenue Gain on Sale of Equipment

Answer 1

Answer

Answer a Fair Value NPV Percentage Since present value of lease Lease term estimated useful life Percentage Since Lease term < 75% of economic life of the leased property the same will be classified as Operting Lease 640,000 336,238 53% ments does not exceed 90% To be classified as Operating Lease 10 30% ASC 842 states that regardless of how a lease is classified, a lessee will be required to recognize a right-of-use asset and a lease liability for substantially all leases at the commencement date Lessee Books Workin Year Year for discountin 0 1 2 Salavge value not Guaranteed Annual Lease Installments paid at the beginning of the year PV factor @5% Present Value of Min lease Value at which to be recorded as asset by lessee is lower of FMV or NPV Amortisation (NPV)/3 years 117,590 1.00000 117,590 117,590 0.95238 111,990 117,590 0.90703 106,658 0.86384 ents 336,238 336,238 115,413 115,413 115,413 346,238 Amortisation Shedule for Lessee Repayment Schedule Reduction in PrincipalOutstandirn Finance Annual Charges Payment Amountg Liability Year 0 336,238 17,590117,590 218,648 117,590 117,590 0 10,932 5,600 16,532 106,658 111,990 352,770336,238 111,990

Lessee Books General Journal Jan 1, 2017 Right-of-Use Asset Lease Liabili To record the lease.) Jan 1, 2017 b1) Record the down Lease Liabilit Cash Debit Credit 336,238 336,238 ent 117,590 117,590 to record lease ent c) To record Amortisation & Interest expense as Lease expense Dec 31, 2017 Lease expenses Right-of-Use Asset Lease Liabilit 126,345 115,413 10,932

Lessor Books Operating Lease General Journal Jan 1, 2017 Machine Asset Cash Jan 1, 2017 Cash Unearned Lease Revenue Debit Credit $ 640,000 640,000 117,590 117,590 Dec 31, 2017 Unearned Lease Revenue Lease Revenue 117,590 117,590 Dec 31, 2017 Depreciation Expense Accumulated Depreciation 64,000 64,000