Question

# At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease...

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 \$35,000 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 \$270,000 (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 \$113,834.) 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 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.)

 1. Effect on Earnings 2. Lease Payable Balance (end of year) Right-of-use asset (end of year)

Solution:

1. Effect on Earnings = \$(35,000)

2. Lease payable Balance (end of year) = \$1,70,394

Right-os-use asset (end of year) = \$2,05,394

Explanation:

The present value of the operating lease:

Lease rental = \$ 35,000

Interset Rate = 10%

Term = 9 years

Annuity Factor = 1+PVAF(10%,8) = 6.33493

So present value = (35000*6.33493) = \$2,21,722

Amount paid in advance = \$35,000

So interest amount =\$ 10%(221,722-35,000) = \$18,672

Total payment = \$35,000

So amount amortize in 1st year = \$(35,000-18672) = \$16,328

Lease payable balance = \$(2,21,722-35,000-16,328) = \$1,70,394

Right-of-use assets = \$(2,21,722-16328) = \$2,05,394

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