At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year leaseagreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginningof the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescentat a cost of $180,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at theend of its life. (Because the lease term is only nine years, the asset does have an expected residual value at the endof the lease term of $90,995.) Crescent seeks a 10% return on its lease investments. By this arrangement, the leaseis 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 forCrescent (ignore taxes)?
At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease
agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning
of the lease, and at each December 31 thereafter through 2025. The equipment was acquired recently by Crescent
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 $90,995.) Crescent seeks a 10% return on its lease investments. By this arrangement, the lease
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
Crescent (ignore taxes)?
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