Question

Abbott Equipment leased a protein analyzer to Werner Chemical Inc. on September 30,2018. Abbott purchased the machine from NutraLabs,inc. at a cost of $6.5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $424,177 payable each September 30, December 31, March 31, June 30, with the first payment at September 30h,2018. Abbott's implicit interest rate is 16%.

What pretax amounts related to the lease would Abbott report in its balance sheet at December 31,2018 and income statement for the year ended December 31, 2018? Round your answers to the nearest whole dollar.

Lease Receivable= ????

Interest Revenue= ????

Thanks!

Answer 1

	Lease agreement term=5 years
	Lease is paid quarterly
	Total lease payment over the lease agreement=5*4=20 quarters
	Implicit interest rate=16%
	Implicit interest rate per quarter=16%/4=4%
	Use this 4% for present value computation for 20 periods
	First lease payment is made at the beginning of the year (Year 0).Present value will be 1
	Then find present value at 4% for 19 years
	Present value of lease payment=Lease Liability*(Present value interest annuity factor at 4% for 20 years)=424177*14.13394=$ 5995292
	Lease receivable
	Beginning balance			5995292
	Sep 30,2018 reduction			-424177
	(Note:1)
	Dec 31,2018 reduction			-201332
	(Note:2)
	Ending balance			5369783
	Notes:
	1. There will be no interest component at the beginning of lease payment.Hence entire lease rental will be deducted from lease liability
	2. Interest component in lease rental=(5995292-424177)*4%=$ 222845
	Principal component=424177-222845=$ 201332
	Pretax amount of lease receivable as on Dec 31,2018=$ 5369783
	Pretax amount of interest revenue as on Dec 31,2018=$ 222845 (Ref. note:2)