Question

On June 30, 2018, Blue, Inc. leased a machine from Large Leasing Corporation. The lease agreement calls for Blue to make semiannual lease payments of $229,400 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Blue’s incremental borrowing rate is 12%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Large constructed the machine at a cost of $1,259,000. (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.) Required: 1. Determine the price at which Large is “selling” the machine (present value of the lease payments) at June 30, 2018 (to the nearest $000). 2. What would be the amounts related to the lease that Large would report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What would be the amounts related to the lease that Large would report in its income statement for the year ended December 31, 2018? (Ignore taxes.) (For all the requirements, round your answers to the nearest whole dollar amounts.)

Answer 1

Solution 1:

Semiannual lease payment = $229,400

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 12%, 6% semiannual

Sale value of Machine (Present value of minimum lease payments) = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 6%

= $229,400 * 6.582381 = $1,510,000

Solution 2:

Semiannual payment on 30.06.2018 = $229,400

Amount receivable on 30.06.2018 = ($1,510,000 - $229,400) = $1,280,600

Interest revenue for 31.12.2018 = $1,280,600 * 6% = $76,836

Semiannual lease payment on 31.12.2018 = $229,400

Pre tax amount of net receivables LLC report in its balance sheet at December 31, 2018 = $1,280,600 + $76,836 - $229,400 = $1,128,036

Solution 2:

Pre tax amount of interest revenue LLC report in its income statement for year ended Dec 31, 2018 = $1,280,600 * 6% = $76,836