At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporati

Question

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 $27,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent at a cost of $198,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $46,826.) Crescent seeks a 9% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
  
Required:
1. What will be the effect of the lease on Café Med’s earnings for the first year (ignore taxes)? (Enter decreases with negative numbers)
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.

Explanation / Answer

= present value of an annuity due of $1: n = 9, i = 9%

1 Income Statement: Interest (10% × [$176,537* – $27,000]) $14,954 Amortization for the year ($27,000 – $14,954) $12,046 Lease expense; decrease in earnings (pretax) $27,000 Note * $27,000 x 6.53842 (using financial calculator) $176,537 present value of an annuity due of $1: n = 9, i = 9% 2 Balance sheet Lease payable Initial balance ($27,000 × 6.53842) $176,537 Jan. 1, 2018 reduction (first lease payment) -$27,000 Dec. 31, 2018 reduction ($27,000 – 10% × [$176,537 – $2,000] -$14,957 End-of-year balance $134,580 Right-of-Use Asset Initial balance ($27,000 × 6.53842) $158,373 Amortization for the year ($27,000 – 10% × [$176,537 – $27,000]) -$14,597 End-of-year balance $143,776

= present value of an annuity due of $1: n = 9, i = 9%

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