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 $545,210 over a 4-year lease term (also the asset’s useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 10.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.2 million. (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 price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2021.
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)?
(For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to the nearest whole dollar.)

1.	Present Value
2.	Amount to be reported on the balance sheet
3.	Amount to be reported in the income statement

Answer 1

1.

Semiannual lease payments of $545,210 over a 4-year lease term (also the asset’s useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 10.0%

Hence, i = interest rate er period = semi annual interest rate = 10% / 2 = 5%

n = number of payments = 2 x 4 = 8 half years

Annuity is paid at the beginning of the period. Hence relevant factor will be Present value annuity due (PVAD) factor.

Present value = PV = Annuity x PVAD (i = 5%, n = 8) = $ 545,210 x  6.78637 =  3,700,000

2.

Receivable after first installment on June 30, 2021 = 3,700,000 - 545,210 = 3,154,790

Interest for next 6 months till Dec 31, 2021 = 3,154,790 x 5% =  157,740

Principal portion form the second lease installment = 545,210 - 157,740 =  387,471

Amount to be reported on the balance sheet = Net receivable = 3,154,790 - 387,471 = $ 2,767,320

3.

It will report interest as revenue and cost of equipment as cost of goods sold.

Interest income = $ 157,740

Cost of goods sold = $ 3,200,000