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 $27,000 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 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 $46,826.) Both (a) the present value of the lease payments and (b) the present value of the residual value (i.e., the residual asset) are included in the lease receivable because the two amounts combine to allow the lessor to recover its net investment. Crescent seeks a 9% return on its lease investments. By this arrangement, the lease is deemed to be a finance lease to the lessee. (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 Crescent'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 Crescent? (ignore taxes) 1. 2. Effect on earnings Lease receivable balance (end of year)

Answer 1

Here you go with complete solution..effect of lease on Crescent's earnings for the year and Outstanding balance as at the end of year

Instt. Date 01-01-2021 31-12-2021 31-12-2022 31-12-2023 31-12-2024 31-12-2025 31-12-2026 31-12-2027 31-12-2028 31-12-2029 Nature Lease Rentals Lease Rentals Lease Rentals Lease Rentals Lease Rentals Lease Rentals Lease Rentals Lease Rentals Lease Rentals Residual Value Amount 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 46,826 Discount Factor 1.000 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 Amount 27,000 24,771 22,725 20,849 19,127 17,548 16,099 14,770 13,550 21,560 1,98,000 1) Effect of Lease on Crescent's Earnings for the first year Lease Rentals will arise of Rs. 27000/- each dated 01-01-2021 and 31-12-2021. Depreciation Expense will not be available to Crescent, as the nature of lease is financial, if lease not provided the company could have claimed Depreciation amounting to Rs. 16,500/- 2) Balance in the balance sheet accounts related to the lease at the end of the first year for Crescent's Particulars Amount Lease Receivable $1,98,000 Less. First Instt. - 01/01/2021 $27,000 Add. Finance Charges $15,390 Less. Second Instt. - 31/12/2021(Principal amount) $27,000 Closing $1,59,390 Current Portion ($27,000 - $14,345) $12,655 Non-Current Portion $146,735 Interest Instt. Date 01-01-2021 31-12-2021 31-12-2022 31-12-2023 31-12-2024 31-12-2025 31-12-2026 31-12-2027 31-12-2028 31-12-2029 Balance 198000.00 171000.00 159390.00 146735.00 132941.00 117906.00 101518.00 83655.00 64184.00 42961.00 15,390 14,345 13,206 11,965 10,612 9,137 7,529 5,777 3,865 Instt 27,000.000 27,000.000 27,000.000 27,000.000 27,000.000 27,000.000 27,000.000 27,000.000 27,000.000 46,826.000 Closing 1,71,000 1,59,390 1,46,735 1,32,941 1,17,906 1,01,518 83,655 64,184 42,961