Question

On June 30, 2021, Blue, Inc. leased a machine from Big Leasing Corporation. The lease agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of $231,346 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2021. Blue’s incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts.

The lease agreement qualifies as a sales-type lease without selling profit. Depreciation is recorded on a straight-line basis at the end of each fiscal year. (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 would be the amounts related to the lease that Big would report in its balance sheet at December 31, 2021? (Ignore income taxes.) (Round the PV of semi-annual lease payments to nearest thousand.)

2. What would be the amounts related to the lease that Big would report in its income statement for the year ended December 31, 2021? (Ignore income taxes.) (Round your answer to the nearest whole dollar amounts.)

Answer 1

1)Amount reports in Big's Balance sheet at December 31,2021 =
Leased Liability (calculated above)	$                  1,338,654
Leased Assets
Initial balance, June 30,  2021	$                  1,570,000
Accumulated depreciation at Dec. 31, 2021 = $1,570,000 / 4 year x 1/2 year	$                   (196,250)
Leased Assets	$                  1,373,750
2) Amount reports in Big's Income statement at December 31,2021 = interest expense
June 30, 2021 interest expense	0
Dec. 31, 2021 interest expense	$66,933
Interest expense for 2021		$66,933
Depreciation Expenses		$        196,250
Total Expenses		$263,183