Question

On June 30, 2021, Georgia-Atlantic, Inc. leased a warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $677,829 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $4.6 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.)

1. Determine the present value of the lease payments at June 30, 2021 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, 2021?
3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2021?

Answer 1

1) Right to use Asset = 46,00,000

Lease lIability = 46,00,000

2) Amounts related to lease in Balance Sheet at Dec 2021.

Right to use asset = $40,25,000

lease Liability = $34,40,451

3) Amounts related to lease in income statement for 2021.

Amortization each year = (4600,000/4)

= $1150,000

Asset used in the 2021 is for 6 months i.e. from 1 july to 31 dec.

Thats why aortisation for 2021 is = 1150000/12*6

= $575000

Finance cost = (3922172*10%)*6/12

= $ 196109