Question

In: Accounting

At January 1, 2021, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease...

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 $28,000 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 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 $69,847.) 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.)

Required:
1. 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)

Solutions

Expert Solution

Period Lease payment & Residual Value PV Factor @10% Present Value $
0                      28,000 1                 28,000
1                      28,000 0.90909                 25,455
2                      28,000 0.82645                 23,140
3                      28,000 0.75131                 21,037
4                      28,000 0.68301                 19,124
5                      28,000 0.62092                 17,386
6                      28,000 0.56447                 15,805
7                      28,000 0.51316                 14,368
8                      28,000 0.46651                 13,062
9                      69,847 0.42410                 29,622
Total                  321,847              207,000
1.) Effect on Earnings $ 21,480 =(207000-28000)*12%
( Increase due to Interest income )
2.) Lease Receivable balance ( end of year ) $ 172,480 =207000-28000-(28000-21480)

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