Question

On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-year lease term (also the asset’s useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. GeorgiaAtlantic’s incremental borrowing rate is 10%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $2.5 million. Required: 1. Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2021 (to the nearest $000). 2. What amount related to the lease would Builders report in its balance sheet at December 31, 2021 (ignore taxes)? 3. What line item amounts related to the lease would Builders report in its income statement for the year ended December 31, 2021 (ignore taxes)?

Answer 1

Solution 1:

Price at which builders is selling the equipment = Present value of lease payments

= $562,907 * Cumulative PV factor at 5% for 3 periods of annuity due

= $562,907 * 5.329477 = $3,000,000

Solution 2:

Amount related to lease builder inc report in balance sheet:

Lease receivables on 30.06.2021 = $3,000,000 - $562,907 = $2,437,093

Interest revenue on 31.12.2021 = $2,437,093 * 5% = $121,855

Lease payment on 31.12.2021 = $562,907

Lease receivables on 31.12.2021 = $2,437,093 + $121,855 - $562,907 = $1,996,041

Solution 3:

Amount to be reported in income statement:

Sales revenue = $3,000,000

Cost of goods sold = $2,500,000

Interest revenue = $121,855

Amount to be reported in income statement = $3,000,000 - $2,500,000 + $121,855 = $621,855