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 $31,000 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 $234,000 (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 $68,243.) 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 table below.)
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 numbers)
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 to the nearest whole dollar amount.)
Annual Payments of 29000 * what again? Could you please show your work for all three parts? :) thank you,

1. Effect on Earnings (31,000) 2. Lease Payable Balance (end of the year) ?? Right-of-use asset balance (end of the year) ??

Explanation / Answer

year Lease Discount@9% Present value 2018 31000 1 31000 2019 31000 0.917431 28440.37 2020 31000 0.84168 26092.08 2021 31000 0.772183 23937.69 2022 31000 0.708425 21961.18 2023 31000 0.649931 20147.87 2024 31000 0.596267 18484.29 2025 31000 0.547034 16958.06 248000 187021.5 1 Effect on earnings in the first year is 31000, since annual lease payment is 31000 2 Lease payable balance 187021.5-(187021.5-31000)*9% 172979.6 3 Right of use asset balance 172979.6

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