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 $24,000 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 $162,000 (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 $52,070.) Crescent seeks a 12% return on its lease investments. By this arrangement, the lease is deemed to be a finance 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. Round your intermediate calculations to the nearest whole dollar amount.)
  
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 $24,000 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 $162,000 (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 $52,070.) Crescent seeks a 12% return on its lease investments. By this arrangement, the lease is deemed to be a finance 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. Round your intermediate calculations to the nearest whole dollar amount.)
  
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.)
  

LEASE PAYABLE WAS FOUND TO BE $109,529

  

Answer 1

1)
Effect of the lease on Café Med’s earnings for the first year	$                    -24,000.00
Income Statement:
Interest (8% × [$141678.60 – $21,000]	$                      14,306.69
Amortization for the year ($21,000 – $9654.29)	$                        9,693.31
Lease expense; decrease in earnings (pretax)	$                      24,000.00
Initial Balance = $24000 x 5.9676	$                    143,222.40
Present value of an annuity due of $1: n = 9, i = 12%	5.9676
2)
Balance sheet
Lease payable balance (end of year)	$                    109,529
Right-of-use asset balance (end of year)	$                    133,529
Lease payable
Initial Balance = $24000 x 5.9676	$                    143,222.40
Jan. 1, 2018 reduction (first lease payment)	$                    -24,000.00
Dec. 31, 2018 reduction ($24,000 – 12% × [$143,222.40 – $24,000]	$                      -9,693.31
End-of-year balance	$                    109,529
Right-of-Use Asset
Initial Balance = $24000 x 5.9676	$                    143,222.40
Amortization for the year ($24,000 – 12% × [$143,222.40 – $24,000]	$                      -9,693.31
End-of-year balance	$                    133,529

(For all requirements, round your intermediate calculations and final answers to the nearest whole dollar.) 8 (1) Effect of the lease on Café Med's earnings for the first year =-B14 11 Income Statement: Interest (8% ($141678.60 - $21,000] Amortization for the year ($21,000 - $9654.29) Lease expense; decrease in earnings (pretax) =12% *(B16-24000) =24000-B12 =B12+B13 16 Initial Balance = $24000 x 5.9676 Present value of an annuity due of $1: n = 9,1 = 12% =24000*817 5.9676 19 Balance sheet Lease payable balance (end of year) 22 Right-of-use asset balance (end of year) =B28 =B33 24 Lease payable 25 Initial Balance = $24000 x 5.9676 26 Jan 1, 2018 reduction (first lease payment) =B16 - 24000 27 Dec 31, 2018 reduction ($24,000 - 12% ($143,222.40 - $24,000] 28 End-of-year balance --(24000-(12%*(B16-24000))) =B25+B26+B27 30 Right-of-Use Asset Initial Balance = $24000 x 5.9676 32 Amortization for the year ($24,000 - 12% * ($143,222.40 - $24,000] End-of-year balance =B25 =B27 =B31+B32