At January 1, 2024, Caf Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement.

The lease agreement specifies annual payments of $29,000 beginning January 1, 2024, the beginning of the lease, and on each December 31 thereafter through 2031.

The equipment was acquired recently by Crescent at a cost of $207,000 (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.

Because the lease term is only nine years, the asset does have an expected residual value at the end of the lease term of $94,113.

Crescent seeks a 12% return on its lease investments.

By this arrangement, the lease is deemed to be an operating lease.

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:

What will be the effects of the lease on Crescents (lessors) earnings for the first year (ignore taxes)?

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)?

Questions:

1. Effect on earnings

2. Equipment balance (net, end of year)

3. Deferred lease revenue