Question

At January 1, 2021, Café Late leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $27,000 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 $198,000 (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 $46,826.) Crescent seeks a 9% 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. Round your intermediate calculations to the nearest whole dollar amount.) Required:

1. What will be the effect of the lease on Café Late 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 Late (ignore taxes)? (For all requirements, round your intermediate calculations and final answers to the nearest whole dollar.)

Answer 1

Year	PV Due Factor @9%	Remark
1	1.00000
2	0.91743	= 1 / 1.09
3	0.84168	= 0.91743 / 1.09
4	0.77218	= 0.84168 / 1.09
5	0.70843	= 0.77218 / 1.09
6	0.64993	= 0.70843 / 1.09
7	0.59627	= 0.64993 / 1.09
8	0.54703	= 0.59627 / 1.09
9	0.50187	= 0.54703 / 1.09
Total	6.53482

Lease liability at beginning (27000*6.53482)

$       176,440

Lease Amortization Schedule (Lessee)
Date	Annual Lease Payment	Interest on Liability	Reduction of Lease Liability	Lease Liability
Jan 1, 2021				$    176,440
Jan 1, 2021	$     27,000	$                  0	$      27,000	$    149,440
Dec 31, 2021	$     27,000	$       13,450	$      13,550	$    135,890

Interest on Liability = Beginning Lease Liability * 9%

Reduction of Lease Liability = Annual Lease Payment - Interest on Liability

Lease Liability = Beginning Lease Liability - Reduction of Lease Liability

Lessee: Income Statement
Interest expense	$          13,450
Amortization expense (176440/9)	$          19,604
Decrease in pretax earnings	$          33,054
Lessee: Balance Sheet
Lease payable	$       135,890
Right-of-Use Asset (176440-19604)	$       156,836