Question

Abbott Equipment leased a protein analyzer to Werner Chemical, Inc., on September 30, 2021. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6.1 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $365,741, payable each September 30, December 31, March 31, and June 30, with the first payment at September 30, 2021. Abbott's implicit interest rate is 8%. The useful life of the equipment is five years. (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. What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2021?
2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2021?
3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2021?

Answer 1

1	Present Value of Lease Payments ( 365741 * PVAD(2%,20)	$365,741	16.68	$6,100,559.88
	Initial Balance, September 30,2021 (a)			$6,100,559.88
	Less - September 30 Reduction (b)			$365,741
	Less December 31 2021 Reduction (c)			$251,044
	(365741 - (6100559.88 - 365741) *2%
	December 31 Net Liability {a - (b+c)}			$5,483,775
2	Initial Balance, September 30,2021 (a)			$6,100,559.88
	Less - Accumulated Depreciation at December 31,2021			$305,027.99
	($6,100,559.88 / 5 years * 1/4 Year)
	December 31 Net Asset Value			$5,795,531.89
3	September Interest Expense			0
	December 31 Interest Expense
	6100559.88 - 365741 *2%			$114,696
	Interest Expense for year 2021			$114,696
	Depreciation Expense for year 2021			$305,027.99
	Total Expense			$419,724

If you have any query related to this solution, feel free to ask.