Question

On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $414,415 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 10%, the same rate IC uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $3.4. (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 present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.
2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018?
3. What pretax amounts related to the lease would Georgia-Atlantic 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 answer to nearest whole dollar.)
  

1.	Present value
2.	Pretax amount for liability
	Pretax amount for right-of-use asset
3.	Pretax amount for interest expense
	Pretax amount for amortization expense

Answer 1

1	Present Value	3,360,000
2	Pretax amount for liability	2,678,449
	Pretax amount for right-of-use asset	2,800,000
3	Pretax amount for interest expense	147,279
	Pretax amount for amortization expense	560,000

Calculation of the present value of lease payments

$414,415 * 8.107822 = $3,360,000 (rounded)

Present value of an annuity due of $1: n = 10, i = 5%

Liability at December 31, 2018

Initial balance, June 30, 2018 $ 3,360,000

June 30, 2018 reduction ($414,415)*

Dec. 31, 2018 reduction($267,136)**

December 31, 2018 net liability 2678449

Right-of-Use Asset at December 31, 2018

Initial balance, June 30, 2018 $ 3,360,000

Dec. 31, 2018 reduction ($560,000)**

31-Dec-18 $ 2,800,000

Expenses for year ended December 31, 2018

June 30, 2018 interest expense 0*

Dec. 31, 2018 interest expense $ 147,279 **

Interest expense for 2018 $ 147,279

Amortization expense for 2018 $ 560,000

Total expenses $ 707,279

June 30, 2018*

Right-of-use asset (calculated in req. 1) $ 3,360,000

Lease payable (calculated in req. 1) $ 3,360,000

Lease payable$ 414,415

Cash (lease payment)$ 414,415

December 31, 2018**

Interest expense (5% * [$3.36 million - 414,415]) $ 147,279

Lease payable (difference)$ 267136

Cash (lease payment)$ 414,415

Amortization expense ($3.36 million / 3 years × ½ year)$ 560,000

Right-of-use asset $ 560,000