Question

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 $25,000 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 $180,000 (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 $50,995.) Crescent seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating 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 Café Med'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 Café Med? (ignore taxes)
(For all requirements, round your intermediate calculations and final answers to the nearest whole dollar.)

Effect on earnings	???
Lease payable balance (end of year)	???
Right-of-use asset balance (end of year)	???

Answer 1

Effect on earnings	($25,000)
Lease payable balance (end of year)	$121,710
Right-of-use asset balance (end of year)	$146,710

1.)
Present value of lease payment =(Annual lease payment)*PV(RATE,NPER,PMT,FV,TYPE)
=$25,000*PV(10%,9,-$1,,1)
=$25,000*6.33493
=$158,373

Interest expense = (Present value of lease payment - Annual lease payment)*Interest rate
=($158,373-$25,000)*10%
=$13,337.30

Amortization Expense = Lease Amount - Interest Expense
=$25,000-$13,337
=$11,663

The Effect on Income Statement:
Interest = $13,337
Amortization = $11,663
Lease Expense that will decrease earnings = $25,000
Effect on CM earnings decrease by lease expense of $25,000

Particulars	Amount	Amount
Lease payable
Initial balance ($25,000*6.33493F)	$158,373
Jan 1.2018 reduction (first lease payment)	$(25,000)
Dec 31.2018 reduction ($25,000-10%*($158,373-$25,000)	$(11,663)
End of the year balance		$121,710
Right of use Asset
Initial balance		$158,373
Amortization for the year ($25,000-10%*($158,373-$25,000))		$(11,663)
Ending of the year balance		$146,710