Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $403,067 over a 5-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 8.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $2.9 million. (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 price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.
2. What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?
3. What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?

(For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to nearest whole dollar.)

	1. Present value 2. Amount to be reported in the balance sheet 3. Amount to be reported in the income statement

Answer 1

Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.	$     3,400,000
What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?	$     2,713,743
What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?	$             619,877

Working:

1	Calculation of the present value of lease payments ("selling price")
	n= 10, i= 4%
	8.435322
	=403067*8.435322
	3399999.933
2	Receivable at December 31, 2018
	Initial balance, June 30, 2018	3399999.933
	June 30, 2018 reduction	403067
	Dec. 31, 2018 reduction	283189.6827
	403,067-(3,400,000-403,067)*4%
	December 31, 2018 receivable	2713743.25
	=(3400000-403067-283190)
3	Income effect for year ended December 31, 2018
	June 30, 2018 interest revenue	0
	Dec. 31, 2018 interest revenue	119877.3173
	=(3400000-403067)*4%
	Interest revenue for 2018	119877
	Sales revenue*	3399999.933
	Cost of goods sold*	2900000
	Income effect	619876.9326