Question

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 $478,550 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incremental borrowing rate is 12%, 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 $3.2

Required:

1. Determine the present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.

2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018?

3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018?

Answer 1

Solution 1:

Semiannual lease payment = $478,550

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 12%, 6% 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 6%

= $478,550 * 6.58238 = $3,149,998

Solution 2:

Semiannual payment on 30.06.2018 = $478,550

Pretax amount of liability on 30.06.2018 = ($3,149,998 - $478,550) = $2,671,448

Interest expense for 31.12.2018 = $2,671,448 * 6% = $160,287

Semiannual lease payment on 31.12.2018 = $478,550

Pre tax amount for liability December 31, 2018 = $2,671,448 + $160,287 - $478,550 = $2,353,185

Depreciation on right to use assets for 2018 = $3,149,998 / 4 * 6/12 = $393,750

Pre tax amount of right to use asset to be reported for 2018 = $3,149,998 - $393,750 = $2,756,248

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $2,671,448 * 6% = $160,287

Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement = $3,149,998 / 4 * 6/12 = $393,750