Question

Question 23 Assume that on January 1, 2021, Metlock Corporation sells equipment to Ivanhoe Finance Co. for $1,850,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Metlocks books at a value of $1,630,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Metlocks, and the expected residual value at the end of the lease is 1,222,500, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $301,695 at the beginning of each year. 4. The incremental borrowing rate for Metlock is 8%. Metlock is aware that Ivanhoe Finance set the annual rental to ensure a rate of return of 8%. 5. The equipment has a fair value of $1,850,000 on January 1, 2021, and an estimated economic life of 10 years. Click here to view factor tables. Prepare the journal entries for both the lessee and the lessor for 2021 to reflect the sale and leaseback agreement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit Metlock Corporation (Seller-Lessee) 1/1/2112/31/21 (To record sale) 1/1/2112/31/21 (To record lease) 1/1/2112/31/21 (To record first lease payment) 1/1/2112/31/21 Date Account Titles and Explanation Debit Credit Ivanhoe Corporation (Buyer-Lessor) 1/1/2112/31/21 (To record purchase) 1/1/2112/31/21 (To record lease payments) 1/1/2112/31/21 (To record lease revenue) 1/1/2112/31/21 (To record depreciation) Question Attempts: 0 of 1 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

Answer:

Elmer’s Restaurants (Seller-Lessee)

No.	Date	General journal	Debit	Credit
1	1/1/17	Cash	1850000
		Equipment		1630000
		Gain on sale of equipment		220000
2	1/1/17	Right-of-Use Asset	839696
		Lease Liability (301695*2.78326)		839696
3	1/1/17	Lease Liability	301695
		Cash		301695
4	12/31/17	Lease expense	301695
		Lease liability (839696- 301695) * 8%		43040
		Right-of-Use Asset		258655

Present value of an annuity due for 3 periods at 8% is 2.78326 (1+ 1.78326)

Lease is treated as operating lease as not criterions for finance lease classification are met

Pharoah Finance Co. (Buyer-Lessor)

No.	Date	General journal	Debit	Credit
1	1/1/17	Equipment	1850000
		Cash		1850000
2	1/1/17	Cash	839696
		Unearned Lease Revenue		839696
3	12/31/17	Unearned Lease Revenue	301695
		Lease revenue		301695
4	12/31/17	Depreciation Expense	185000
		Accumulated Depreciation – Equipment ($1850000÷ 10)		185000

Lease is treated as operating lease as not criterions for sales-type lease classification are met