Question

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 $28,000 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 $198,000 (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 $66,277.) Crescent seeks a 11% 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 sign.)
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 and final answers to the nearest whole dollar.)
  

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 $28,000 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 $198,000 (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 $66,277.) Crescent seeks a 11% 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 sign.)
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 and final answers to the nearest whole dollar.)
  

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 $28,000 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 $198,000 (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 $66,277.) Crescent seeks a 11% 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 sign.)
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 and final answers to the nearest whole dollar.)
  

1. Effect on earnings:

2. lease payable balance( end of the year):

right-of-use asset balance( end of the year):

Answer 1

Calculation of the Present value of lease payements

Period	Cash flow	PV factor @ 11%	Present Value
0	28000	1.00000	28,000.00
1	28000	0.90090	25,225.23
2	28000	0.81162	22,725.43
3	28000	0.73119	20,473.36
4	28000	0.65873	18,444.47
5	28000	0.59345	16,616.64
6	28000	0.53464	14,969.94
7	28000	0.48166	13,486.44
8	28000	0.43393	12,149.94
9	28000	0.39092	10,945.89
Total	183,037.33

Thus the right of use asset and the lease liability would be recorded at $183,037

Amortization Schedule

Period	Lease Payments	Interest @11%	Lease liability amortization	Lease liability Carrying Value
0	28,000.00	0	28,000.00	155,037.00
1	28,000.00	17,054.07	10,945.93	144,091.07
2	28,000.00	15,850.02	12,149.98	131,941.09
3	28,000.00	14,513.52	13,486.48	118,454.61
4	28,000.00	13,030.01	14,969.99	103,484.61
5	28,000.00	11,383.31	16,616.69	86,867.92
6	28,000.00	9,555.47	18,444.53	68,423.39
7	28,000.00	7,526.57	20,473.43	47,949.97
8	28,000.00	5,274.50	22,725.50	25,224.46
9	28,000.00	2,775.54	25,224.46	0.00

The journal entries would be

Date	Account	Debit	Credit
Jan 1, 2021	Right of use asset	183,037
	Lease Liability		183,037
	(Right of use asset and lease liability recognized)
Jan 1, 2021	Lease Liability	28,000
	Cash		28,000
	(1st installment at the beginning of the year paid)
Jan 1, 2021	Lease Expenses	28,000
	Right of use asset		28,000
	(lease expense recorded)
Dec 31, 2021	Lease Liability	28,000
	Cash		28,000
	(Installment paid at the year end)
Dec 31, 2021	Lease Expenses	28000
	Lease Liability		17,054.07
	Right of use asset(Plug)		10,945.93
	(lease expense recorded)

Therefore in the books of Cafe Med

1. Effect on earnings = -56,000 (28000 *2)

2. Lease Payable Balance = $144,091.07

Right of use asset balance = $144,091.07

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