At January 1, 2018, Café Med leased restaurant equlpment from Crescent Corporati

Question

At January 1, 2018, Café Med leased restaurant equlpment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $26,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. 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 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 $21,925.) Crescent seeks a 9% 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 approprlate factor(s) from the tables provided.) 7.14 points Required: 1. What will be the effect of the lease on Café Med's earnings for the first year (Ignore taxes)? (Enter decreases wlth negative numbers) eBook (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)? Hint For all requirements, round your Intermediate calculatlons to the nearest whole dollar amount.) Print 1. Effect on earnings 2. Lease payable balance (end of year) $ (26,000) References Right-of-use asset balance (end of year)

Explanation / Answer

Solution 1:

Right to use assets = Present value of lease payments

= $26,000 * cumulative PV factor for annuity due at 9% for 9 periods

= $26,000 * 6.53482 = $169,905

Interest expense for first year = ($169,905 - $26,000) * 9% = $12,951

Amortization for the year = $26,000 - $12,951 = $13,049

Effect on earnings for first year = Interest expense + Amortization expense = -$12,951 - $13,049 = ($26,000)

Solution 2:

Lease payable balance (End of year) = beginning balance + Interest expense - Payments

= $169,905 + $12,951 - $26,000 - $26,000 = $130,856

Right of use asset balance (end of year) = Begininnig balance - Amortization

= $169,905 - $13,049 = $156,856

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