At January 1, 2016, Café Med leased restaurant equipment from Crescent Corporati

Question

At January 1, 2016, Café Med leased restaurant equipment from Crescent Corporation under a(n) nine-year lease agreement. The lease agreement specifies annual payments of $21,000 beginning January 1, 2016, the beginning of the lease, and at each December 31 thereafter through 2023. The equipment was acquired recently by Crescent at a cost of $171,000 (its fair value) and was expected to have a useful life of 12 years with no residual value. The company seeks a 9% return on its lease investments. By this arrangement, the risks and rewards of ownership are deemed to have been transferred to the lessee. (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.)

   

Respond to the question with the presumption that the guidance provided by the proposed Accounting Standards Update is being applied.

What will be the effect of the lease on Café Med’s earnings for the first year (ignore taxes)?

Respond to the question with the presumption that the guidance provided by the proposed Accounting Standards Update is being applied.

Explanation / Answer

0

Statement showing effect of the lease on Café Med’s earnings for the first year (ignore taxe) End of year Annual Lease payment Depreciation Net cash Outflows Present
value of
Factor@ 9% Present
value of
cash
Flows@ 9% {1} {2} {3} {2-3} 5 {2*5}

0

21000 21000 1 21000 1 21000 14250 6750 0.9174 6192 Total outflow effect to revenue for the year 27192 Note: Depreciation calculation Depreciation {171000/12} 14250

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