Question

Assume that on January 1, 2017, Elmer’s Restaurants sells a computer system to Blossom Finance Co. for $820,000 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 $740,000.
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 $590,000, all of which is unguaranteed.
3.		The lease agreement requires equal rental payments of $113,690 at the beginning of each year.
4.		The incremental borrowing rate for Elmer is 7%. Elmer is aware that Blossom Finance Co. set the annual rental to insure a rate of return of 7%.
5.		The computer has a fair value of $820,000 on January 1, 2017, and an estimated economic life of 10 years.

Answer 1

Hope this question is for preparing the journal entries.

1) Entry while selling the Computer system

Jan 1st 2017

Blossom Finance Co A/C Dr $820,000

To Asset account( Computer system) $740,000

To Profit on sale on asset A/c $80,000

(Being computer system has sold to Blossom Finance with a profit on sale of asset)

2)Jan 1st 2017

Rent account Dr $113,690

To Blossom Finance A/C $113,690

(Being advance rent has paid on the lease agreement)

3)

Jan 1st 2018

Rent account Dr $113,690

To Blossom Finance A/C $113,690

(Being advance rent has paid on the lease agreement)

4)

Jan 1st 2019

Rent account Dr $113,690

To Blossom Finance A/C $113,690

(Being advance rent has paid on the lease agreement)

Blossom Books

1)Jan 1st 2017

Computer System Asset A/c Dr $820,000

To Elmer's A/C $820,000

(Being computer system has purchased from Elmer )

2)  Jan 1st 2017

Elmer's A/C Dr $113,690

To Rent (income in advance) $113,690

(Being advance rent has accounted)

3)

Jan 1st 2018

Elmer's A/C Dr $113,690

To Rent (income in advance) $113,690

(Being advance rent has accounted)

4)

Jan 1st 2019

Elmer's A/C Dr $113,690

To Rent (income in advance) $113,690

(Being advance rent has accounted)