In: Accounting
At January 1, 2021, 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,
2021, the beginning of the lease, and at each December 31
thereafter through 2028. The equipment was acquired recently by
Crescent at a cost of $207,000 (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
$94,113.) Crescent seeks a 12% 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 sign.)
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
and final answers to the nearest whole dollar.)
1. Effect on earnings: ?
2. Lease payable balance (end of year): $132,349
Right of use asset balance (end of year): ?
Year | PV Due Factor | Remark |
1 | 1.00000 | |
2 | 0.89286 | = 1 / 1.12 |
3 | 0.79719 | = 0.89286 / 1.12 |
4 | 0.71178 | = 0.79719 / 1.12 |
5 | 0.63552 | = 0.71178 / 1.12 |
6 | 0.56743 | = 0.63552 / 1.12 |
7 | 0.50663 | = 0.56743 / 1.12 |
8 | 0.45235 | = 0.50663 / 1.12 |
9 | 0.40388 | = 0.45235 / 1.12 |
Total | 5.96764 |
Lease liability at beginning (29000*5.96764) | $ 173,062 |
Interest on Liability = Beginning Lease Liability * 12% |
Reduction of Lease Liability = Annual Lease Payment - Interest on Liability |
Lease Liability = Beginning Lease Liability - Reduction of Lease Liability |
Lease Amortization Schedule (Lessee) | ||||
Date | Annual Lease Payment | Interest on Liability | Reduction of Lease Liability | Lease Liability |
Jan 1, 2021 | $ 173,062 | |||
Jan 1, 2021 | $ 29,000 | $ 0 | $ 29,000 | $ 144,062 |
Dec 31, 2021 | $ 29,000 | $ 17,287 | $ 11,713 | $ 132,349 |
Part 1
Lessee: Income Statement | |
Interest expense | $ 17,287 |
Amortization expense (29000-17287) | $ 11,713 |
Decrease in earnings or Lease expense | $ 29,000 |
Part 2
Lessee: Balance Sheet | |
Lease payable | $ 132,349 |
Right-of-Use Asset (173062-11713) | $ 161,349 |