Question

Check my work 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 $22,000 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 $189,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at the end of its life. Crescent records depreciation using the straight-line method. 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.) 1.66 points eBook Print References Required: 1. What will be the effects of the lease on Crescent'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 Crescent (ignore taxes)? (For all requirements, round your intermediate calculations to the nearest whole dollar amount.) 1 Effect on earnings 2 Equipment balance (net, end of year) Deferred lease revenue

Answer 1

For Question:1

Cresent receives annual rental of $ 22,000 from Cafe Med for nine years. Its also given in the question that the lease will be treated as operating lease. Hence Crensent records $22,000 as lease income.

While Cresent has acquired the asset for $189,000 and has a useful life of 13 years with zero salvage value at the end of its useful life. It was gven in the question that the cresent uses straight line method of depreciation.Hence depreciation for the year will be (total cost-salavage value)/ useful life which is (189000-0)/13 which works out to 14,538.

Effect on earnings =lease income -depreciation=22,000-14538=7,462.

For Question 2:

a) Effect on earnings :7,462 (refer part 1 above for explanation)

b) Equipment balance=cost of the asset - depreciation

=189,000-14538 (refer part 1 above for explanation)

=174,462

c)Defered lease revenue will be 22,000 as the Cresent receives rent for next year in advance on December 31