2 Exercise 15-13 Lessee; operating lease; effect on financial statements [LO 15-

Question

2 Exercise 15-13 Lessee; operating lease; effect on financial statements [LO 15-4 At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $29,000 beginning January 1,2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recenty by Crescent at a cost of $207.000 (ts fair value) and was expected to have a useful Iife of 12 years with no salvage value at the end of its lIife. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $94113.) Crescent seeks a 12% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. (EV of S1 PV. of St. EVA of $1, PVA of S1. EVAD of$1 and PVAD of S1 (Use appropriate factor(s) from the tables provided.) Required 1. What will be the effect of the lease on Café Med's eamings for the first year (ignore taxes]? (Enter decreases with negative 2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Café Med (ignore taxes)? For all requirements, round your intermediate calculations to the nearest whole dollar amount) Eflect on 2 Leane payable balance lend of year ightof-ne a balance lend of year) MacBook Air 838. ptioncommand command

Explanation / Answer

1 Effect on earnings = $   -29,000 2 Lease payable balance (end of the year) = $ 1,32,349 Right of use asset balance (end of year) = $ 1,61,349 Workings: Present value of lease payment Lease Pyment Year Cash flow P. Factor @12% Present Value First 0 $     29,000 1 $            29,000 Second to ninth 1-8 $     29,000 4.96764 $         1,44,062 Present value $         1,73,062 Income statement Interest {12% X (1,73,062 - $29,000)] = $     17,287 Amortization for the year ($29,000 - $17,287) = $     11,713 Lease expense; decrease in earnings (pretax) = $     29,000 Balancesheet Lease payable Initial balance = $ 1,73,062 Less: Reduction (Jan 1 2018) = $     29,000 Less: Reduction (Dec 31 2018) = $     11,713 End of year balance = $ 1,32,349 Right of use asset Initial balance = $ 1,73,062 Less: Amortization for the year = $     11,713 End of year balance = $ 1,61,349

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