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 $33,000 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 $252,000 (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 years, the asset does have an expected residual value at the end of the lease term of $101,266.) 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 10% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease 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.)
What will be the effect of the lease on Crescent’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
Crescent? (ignore taxes)
PV of lease payment is recorded as lease receivable
PV of lease payment = Lease payment * PVIF annuity due
Lease payment = 33000
Present value of interest factor annuity due ( PVAD) , 10%, 9 = 6.334926
Lease receivable = 33000 * 6.3349 = 209052
.
1. What will be the effect of the lease on Crescent’s earnings for the first year?
.
Lease rental will arise of $33000 each dated Jan 1, 2021 and Dec 31, 2021.
.
Ø Depreciation will not available to Crescent, as nature of lease is finaacial
.
In the first year the crescent earning effect from leas = 33000 * 2 = 66000
.
2. Balance in the balance account related to lease at the end of the first year for crescent’s
.
Particulars |
Amount |
Lease Receivable |
209052 |
Less : First Instalment – Jan 1 , 2021 |
33000 |
Add: Interest |
17605.2 |
Less: Second Instt. – Dec 31, 2021 |
33000 |
Closing |
$160657.2 |
Current portion ( 33000 – 16065.72) |
$16934.28 |
Non-Current portion (160657.2 - 16934.28) |
$143722.92 |
.
Interest table
Date |
Beg. Balance |
Interest |
Instalment |
Closing Bal. |
Jan 1, 2021 |
209052 |
33000 |
176052 |
|
Dec 31, 2021 |
176052 |
17605.2 |
15394.8 |
160657.2 |
Dec 31, 2022 |
160657.2 |
16065.72 |
16934.28 |
143722.92 |
Dec 31, 2023 |