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 $779,353 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 $4.1. (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?

Answer 1

Lease Rental	$        779,353
Lease term	4 Year
Incremental Rate	12%
No. of Payments	8

Period	PV Factor @ 6%
0	1
1	0.9434
2	0.89
3	0.83962
4	0.79209
5	0.74726
6	0.70496
7	0.66506
Annuity Factor	6.58239

1
PV of Lease Rental	=	Lease Rental	*	Annuity Factor(8,6%)
PV of Lease Rental	=	$            779,353	*	6.58239
PV of Lease Rental	=	$        5,130,005

Right-of-use asset	=	$        5,130,005
Lease Liabilitiy	=	$        5,130,005
Lease Liabilitiy after 1st Payament		$        4,350,652

2
Lease Payment	=	$            779,353
Interest Expenses(4350652*6%)	=	$            261,039
Lease Payable Reduction	=	$            518,314
Depreciation(5130005/8)	=	$            641,251

Right to Use Assets	=	$        5,130,005
Accumulated Depreciation	=	$            641,251
Assets Reported in balance sheet		$        4,488,755

Lease Liability	=	$        4,350,652
Lease Liability Accreation(4350652*6%)	=	$         (518,314)
Lease Liability Reported in Balance sheet	=	$        3,832,339

3
Reported in Income Statement
Interest Expenses	=	$            261,039
Depreciation Expenses	=	$            641,251
Total Expenses		$            902,290

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