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 $604,152 over a four-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 $4.1. (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, right of use asset, interest expense, amortization expense

Answer 1

1. n = 4 x 2 = 8.

r = 10 % / 2 = 5 %

PVAD _{5%, n=8} = 6.7864.

Present value of the lease payments as on June 30, 2018 = $ 604, 152 x 6.7864 = $ 4,100,017 or $ 4,100,000.

2. On the balance sheet:

Asset Side : Leased Asset : Cost less Accumulated Depreciation = $ 4,100,000 - $ 512,500 = $ 3,587,500

Liability Side : Lease Liability : $ 4,100,000 - $ 604,152 - $ ( 604,152 - 174,792) = $ 3,066,488.

3. On the income statement :

Depreciation Expense = $ 4,100,000 / 8 = $ 512,500.

Interest Expense = $ ( 4,100,000 - 604,152 ) x 5 % = $ 174,792