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Abbott Equipment leased a protein analyzer to Werner Chemical Inc. on September 30,2018. Abbott purchased the...

Abbott Equipment leased a protein analyzer to Werner Chemical Inc. on September 30,2018. Abbott purchased the machine from NutraLabs,inc. at a cost of $6.5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $424,177 payable each September 30, December 31, March 31, June 30, with the first payment at September 30h,2018. Abbott's implicit interest rate is 16%.

What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31 2018?

Finance Lease= ????

Interest Portion= ????

Principle Portion= ????

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Answer #1

Finance Lease $5,995,292

Interest Portion $222,845

Principle Portion $625,509

Explanation:

Lease receivable :

Present value of lease payments = $424,177 × PVAD of $1 at r = 16% / 4 = 4% , n = 5 × 4 = 20

= $424,177 × 14.13393940

= $5,995,292

Sep 30, 2018 Reduction = $424,177

Dec 31, 2018 Reduction = $424,177 - ($5,995,292 - $424,177) × 4%

= $424,177 - $222,845

= $201,332

Lease Receivable = $5,995,292 - $424,177 - $201,332

= $5,369,783

Interest Revenue :

Interest revenue = ($5,995,292 - $424,177) × 4%

= $222,845

Interest Portion = $222,845

Principle Portion = $424,177 + $201,332 = $625,509

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