Question

On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $681,881 over a 4-year lease term (also the asset’s useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 9.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $4.2 million. (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 Builders is “selling” the equipment (present value of the lease payments) at June 30, 2021.
2. What amount related to the lease would Builders report in its balance sheet at December 31, 2021 (ignore taxes)?
3. What line item amounts related to the lease would Builders report in its income statement for the year ended December 31, 2021

Answer 1

Solution 1
Presnet Value of Lease payments
Total Semiannual Periods (4*2)	8
Incremental Borrowing Rate (9%/2)	4.50%
Semi-annual lease payment	681881
*cumulative PV factor for annuity due at 4.50% for 8 periods	6.892701
Presnet Value of Lease payments	4700002
Solution 2:
Amount to be reprted on balance sheet at December 31
Presnet Value of Lease payments	4700002
Add: Interest Revenue [(4700002-681881)*4.5%]	180815
less: Lease Payments (semiannual payment *2)	1363762
Lease Receivables (Amount to be reported on Balance sheet)	3517055
Solution 3:
Amount to be reported in the income statement for Year ended Dec 31
Sale Revenue	4700002
Less: Cost of goods sold	4200000
Add: Interest revenue	180815
Amount to be reported in the income statement	680817