Question

Please show work and calculations on how you got to answer.

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 $450,399 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incre-mental borrowing rate is 11%, 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 $3.01 million.

Use this Present Value of annuity due factor = 6.68297

1. Determine the present value of the lease payments at June 30, 2018 (to the nearest $000) that Georgia-Atlantic uses to record the right-of-use asset and lease liability.
2. What amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018 (ignore taxes)?
3. What amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018 (ignore taxes)?

Answer 1

Solution 1:

Semiannual lease payment = $450,399

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 11%, 5.50% semiannual

Present value of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 5.50%

= $450,399 * 6.68297 = $3,010,000

Solution 2:

Semiannual payment on 30.06.2018 = $450,3999

Pretax amount of liability on 30.06.2018 = ($3,010,000 - $450,399) = $2,559,601

Interest expense for 31.12.2018 = $2,559,601 * 5.5% = $140,778

Semiannual lease payment on 31.12.2018 = $450,399

Pre tax amount for liability December 31, 2018 = $2,559,601 + $140,778 - $450,399 = $2,249,980

Depreciation on right to use assets for 2018 = $3,010,000 / 4 * 6/12 = $376,250

Pre tax amount of right to use asset to be reported for 2018 = $3,010,000 - $376,250 = $2,633,750

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $2,559,601 * 5.5% = $140,778

Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement = $3,010,000 / 4 * 6/12 = $376,250