Question

Exercise 15-3 Finance lease; lessee; balance sheet and income statement effects [LO15-2] 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 $559,946 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 10%, 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 $3.8. (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 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? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to nearest whole dollar.)

Answer 1

Solution 1:

Semiannual lease payment = $559,946

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 10%, 5% 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%

= $559,946 * 6.78637 = $3,800,000

Solution 2:

Semiannual payment on 30.06.2018 = $559,946

Pretax amount of liability on 30.06.2018 = ($3,800,000 - $559,946) = $3,240,054

Interest expense for 31.12.2018 = $3,240,054 * 5% = $162,003

Semiannual lease payment on 31.12.2018 = $559,946

Pre tax amount for liability December 31, 2018 = $3,240,054 + $162,003 - $559,946 = $2,842,111

Depreciation on right to use assets for 2018 = $3,800,000 / 4 * 6/12 = $475,000

Pre tax amount of right to use asset to be reported for 2018 = $3,800,000 - $475,000 = $3,325,000

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $3,240,054 * 5% = $162,003

Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement = $3,800,000 / 4 * 6/12 = $475,000