Med (ignore taxes)? E15-14 At January l, 2018, Café Med leased restaurant equipm
ID: 2410028 • Letter: M
Question
Med (ignore taxes)? E15-14 At January l, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year leve Lessor, operating agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginaing lease; effectof the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescen at a cost of $180,000 (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 nine years, the asset does have an expected residual value at the end of the lease term of S90.995.) Crescent seeks a 10% return on its lease investments. By this arrange is deemed to be an operating lease. Required: 1. What will be the effect of the lease on Crescent's (lessor's) earnings for the first year (ignore taxes)? 2. What will be the balances in the balance sheet accounts related to the lease at the end of the first year for on financial statements ? L015-4 ment, the lease Crescent (ignore taxes)?Explanation / Answer
Lease revenue = $25,000
Depreciation using straight line method, (180,000/13 years) = $13,846
Pretax earnings = 25,000 – 13,846 = $11,154
Hence, the effect of lease on Crescent’s earnings for the first year = increase in earnings by $11,154.
Fair value of the equipment = $180,000
Less: Accumulated depreciation at the end of firstyear = $13,846
Book value (balance) in balance sheet accounts related to the lease at the end of first year = 180,000 – 13,846 = $166,154