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 $478,767 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 $2.8 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 (ignore taxes)?

Answer 1

Solution 1:

Price at which builders is selling the equipment = Present value of lease payments

= $478,767 * Cumulative PV factor at 4.50% for 8 periods of annuity due

= $478,767 * 6.8927 = $3,299,997

Solution 2:

Amount related to lease builder inc report in balance sheet:

Lease receivables on 30.06.2021 = $3,299,997 - $478,767 = $2,821,230

Interest revenue on 31.12.2021 = $2,821,230 * 4.50% = $126,955

Lease payment on 31.12.2021 = $478,767

Lease receivables on 31.12.2021 = $2,821,230 + $126,955 - $478,767 = $2,469,418

Solution 3:

Amount to be reported in income statement:

Sales revenue = $3,299,997

Cost of goods sold = $2,800,000

Interest revenue = $126,955

Amount to be reported in income statement = $3,299,997 - $2,800,000 + $126,955 = $626,952