Lessee; effect on earnings; Type A lease
Response to the following problem:
At January 1, 2016, Cafe 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, 2016, the beginning of the lease, and at each December 31 thereafter through 2023. The equipment was acquired recently by Crescent at a cost of $176,000 (its fair value) and was expected to have a useful life of 12 years with no residual value. The company seeks a 10% return on its lease investments. By this arrangement, the risks and rewards of ownership are deemed to have been transferred to the lessee. What will be the effect of the lease on Cafe Med's earnings for the first year (ignore taxes)?