At January 1.2018, Café Med leased restaurant equipment from Crescent Corporatio

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 $189,000 (its fair value) and was expected to have a useful life of 13 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 $42,341.) Crescent seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease. (evorsi·pyos, Naos. appropriate factor(s) from the tables provided.) PYAOSI, EVADot$1 and P ADO($) (Use Required: 1. What will be the effect of the lease on Crescent's (lessor's) earnings for the first year? (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 Crescent? (For all requirements, round your intermediate calculations to the nearest whole dollar amount.) Effect on eamings 2 Equipment baiance (net, end of yoar) Deferred lease revenue

Explanation / Answer

Interest (10% × [$171043* – $27000])

$14404

Amortization for the year($27000 - 14404)

12596

Lease Expense; decrease in earnings (Pretax)

27000

* $27000 × 6.33493 = $171043

= present value of an annuity due of $1: n = 9, i = 10%

2. Balance Sheet

Lease payable

Initial balance ($27000 × 6.33493)

$171043

Jan. 1, 2018 reduction (first lease payment)

(27000)

Dec. 31, 2018 reduction ($27000 – 10% × [$171043 – $27000])

(12596)

End-of-year balance

$131447

Right-of-Use Asset Initial balance ($27000 × 6.33493)

$171043

Amortization For The year ($27000 – 10% × [$171043 – $27000])

(12596)

End-of-year balance

$158447

= present value of an annuity due of $1: n = 9, i = 10%

Interest (10% × [$171043* – $27000])

$14404

Amortization for the year($27000 - 14404)

12596

Lease Expense; decrease in earnings (Pretax)

27000

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