Reference no: EM133176126
Question - Assume that on January 1, 2022, Humphrey's Restaurants NV sells a computer system to Liquidity Finance for €680,000 and immediately leases back the computer system. The relevant information is as follows.
1. The computer was carried on Humphrey's books at a value of €600,000.
2. The term of the non-cancelable lease is 3 years; title will not transfer to Humphrey's, and the expected residual value at the end of the lease is €450,000, all of which is unguaranteed.
3. The lease agreement requires equal rental payments of €115,970 at the beginning of each year.
4. The incremental borrowing rate for Humphrey's is 8%. Humphrey's is aware that Liquidity Finance set the annual rental to ensure a rate of return of 8%.
5. The computer has a fair value of €680,000 on January 1, 2022, and an estimated economic life of 10 years.
Required - Prepare the journal entries for both the lessee and the lessor for 2022 to reflect the sale and leaseback agreement.
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