Question

# 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 \$29,000 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 13 years with no salvage value at the end of its life. Crescent records depreciation using the straight-line method. Crescent seeks a 12% 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 effects of the lease on Crescent's earnings for the first year (ignore taxes)? (Enter decreases with negative numbers.) WHAT IS THE EFFECT ON EARNINGS?

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)? (For all requirements, round your intermediate calculations to the nearest whole dollar amount.) WHAT IS THE EFFECT ON EQUIPMENT BALANCE (net, end of year) & DEFFERED LEASE REVENUE

Solution 1:

Crescent will recognized rental revenue of \$29,000 each year for operating lease agreement.

Further depreciation to be charged by Crescent on equipment acquired.

Annual depreciation = Cost of equipment / Useful life = \$207,000 / 13 = \$15,923

Effect on earnings of Crescent = Rental revenue - Depreciation expense = \$29,000 - \$15,923 = \$13,077

Solution 2:

Equipment balance (net) at the end of 2021 = Cost - Accumulated depreciation = \$207,000 - \$15,923 = \$191,077

Deferred lease revenue = Rental received in advance on 31.12.2021 for 2022 year = \$29,000

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