In: Accounting
Exercise 15-25 Lessor; sales-type lease; residual value effect on financial statements [LO15-2, 15-6]
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 $30,000 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 $225,000 (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
$101,495.). Both (a) the present value of the lease payments and
(b) the present value of the residual value (i.e., the residual
asset) are included in the lease receivable because the two amounts
combine to allow the lessor to recover its net investment. Crescent
seeks a 12% return on its lease investments. By this arrangement,
the lease is deemed to be a finance 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
Crescent’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
Crescent (ignore taxes)?
1.Effect on earnings
2.Lease receivable balance (end of year)