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)