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

Question

At January 1, 2018, Café Med leased restaurant equipment 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 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 $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 appropriate factor(s) from the tables provided.)
  
Required:
1. What will be the effect of the lease on Crescent’s (lessor’s) earnings for the first year? (Enter decreases with negative numbers.)
2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Crescent?

(For all requirements, round your intermediate calculations to the nearest whole dollar amount.)

Explanation / Answer

Effect of lease on on earning of lessor Since the lease is classified or deemed to be an operating lease, Lessor will account for entire annual payment of $26000 as income and Lessor will also entile for the depreication on leased equipment. So the effect on the earning will be as follows Income from leased equipment 26000 Less : Depreciation on leased equipment 13846.15 ($180000/13 Years) Net effect on the earning is 12153.85 Balances in the Balance sheet accounts related to lease at the end of first year for Crescent(lessor) is Leased equipment 180000 Less : Accumulated depreication 13846.15 Leased equipment(Net) 166153.85 There will not be deffered lease revenue.

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