At January 1, 2018, Cafe Med leased restaurant equipment from Crescent Corporati
ID: 2610905 • Letter: A
Question
At January 1, 2018, Cafe Med leased restaurant equipment from Crescent Corporation under a nice-year lease agreement. The lease agreement specifies annual payments of $34,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was aquired recently by Crescent at a cost of $261,000 (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 terms, the asset does have an expected residual value at the end of the lease term of $63,196). Crescent seeks a 8% return on its lease investments. By this arrangement, the lease is deemed to be an operating issue. LOOKING FOR NUMERIC ANSWERS FOR BOTH QUESTIONS!!!
1) What will be the effect on the lease of Cafe Med's earnings for the first year (ignore taxes)? (NUMBER ANSWER NOT AN EXPLANATION)
2) What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Cafe Med (ignore taxes)? a) Lease payable balance (end of year)? b) Right of use asset balance (end of year)?
Explanation / Answer
Solution:
Calculation of PV of lease payments
annual lease payment
34,000
terms = n =
9
r = interest rate
8.00%
annual lease payment
34,000
x PVAD (8%,9)
5.747
Hence PV of lease payment
195,398
Present value of lease payment
195398
Less : Payment made on Jan 1,2018
34,000
balance
161,398
Interest expense (161398*0.08)
129211.84
effect on earning (decrease)
129211.84
Lease payable balance at end of year
Present value of lease payment
195398
Less : Payment made on Jan 1,2018
34000
Less : Payment made on Dec 1,2018 (Principal portion) (34000-129211.84)
21088.16
Lease payable balance at end of year
140309.84
right of use asset balance
0
(as its operating lease)
Calculation of PV of lease payments
annual lease payment
34,000
terms = n =
9
r = interest rate
8.00%
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