At January 1 2018 Cafe Med leased restaurant equipment from

At January 1, 2018, Cafe Med leased restaurant equipment from Crescent Corporation under a nice-year lease agreement. The lease agreement specifies annual payments of $34,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was aquired recently by Crescent at a cost of $261,000 (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 terms, the asset does have an expected residual value at the end of the lease term of $63,196). Crescent seeks a 8% return on its lease investments. By this arrangement, the lease is deemed to be an operating issue. LOOKING FOR NUMERIC ANSWERS FOR BOTH QUESTIONS!!!

1) What will be the effect on the lease of Cafe Med\'s earnings for the first year (ignore taxes)? (NUMBER ANSWER NOT AN EXPLANATION)

2) What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Cafe Med (ignore taxes)? a) Lease payable balance (end of year)? b) Right of use asset balance (end of year)?

Solution

Solution:

Calculation of PV of lease payments

annual lease payment

   34,000

terms = n =

             9

r = interest rate

8.00%

annual lease payment

     34,000

x PVAD (8%,9)

   5.747

Hence PV of lease payment

   195,398

Present value of lease payment

   195398

Less : Payment made on Jan 1,2018

     34,000

balance

   161,398

Interest expense (161398*0.08)

     129211.84

effect on earning (decrease)

129211.84

Lease payable balance at end of year

Present value of lease payment

     195398

Less : Payment made on Jan 1,2018

     34000

Less : Payment made on Dec 1,2018 (Principal portion) (34000-129211.84)

     21088.16

Lease payable balance at end of year

   140309.84

right of use asset balance

0

(as its operating lease)