Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $414,921 over a five-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incremental borrowing rate is 8%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc.. at a cost of $3.5 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. What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2018? 2. What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2018? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to nearest whole dollar.)

Answer 1

SOLUTION

(A) Present value of lease payments = $414,921 * Cumualative PV Factor at 4% for annuity due for 10 periods

= $414,921 * 8.43533

= $3,500,000

Payment made on 30.06.2018 = $414,921

Net receivables on 30.06.2018 = $3,500,000 - $414,921 = $3,085,079

Interest on 31.12.2018 = $3,085,079 * 8% * 6/12 = $123,403

Payment made on 31.12.2018 = $414,921

Payment of principal amount on 31.12.2018 = $414,921 - $123,403 = $291,518

Pre tax amount of net receivable to be reported in balance sheet on 31.12.2018

= $3,085,079 - $291,518 = 2,793,561

(B) Net receivables on 30.06.2018 = $3,500,000 - $414,921 = $3,085,079

Pre tax amount of interest revenue to be reported in income statement for year ended Dec 31, 2018

= $3,085,079 * 8% * 6/12 = $123,403