Question

Abbott Equipment leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6.35 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $414,389, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Abbot's implicit interest rate is 16%. (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. What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2018?
2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2018?
3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2018?

What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2018 and income statement for the year ended December 31, 2018? (Enter your answer in whole dollars. Round your intermediate and final answers to nearest whole dollar.)

What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2018 and income statement for the year ended December 31, 2018? (Enter your answer in whole dollars. Round your intermediate and final answers to nearest whole dollar.) 1. Lease receivable 2. Interest revenue What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2018? (Enter your answer in whole dollars. Round your intermediate and final answers to nearest whole dollar.) Finance lease Interest portion Principal portion

Answer 1

1&2) Firstly we need to calculate present value of lease payments over the lease life which will be value of lease receivable to be reported in the balance sheet at Dec 31, 2018.

For discounting, no. of periods will be 20 (5 years*4 quarters in a year) and relevant interest rate will be 4% (16%/4 quarters per year). The present value annuity factor (PVAF) for payment starting with beginning will be used for calculating present value.

Lease Receivable on Sep 30, 2018 = Lease Payments*PVAF(4%, 20 periods) (beginning of periods)

= $414,389*14.13394 = $5,856,949

Interest revenue up to Dec 31, 2018 = Lease receivable after first payment*4%

= ($5,856,949-$414,389)*4% = $217,702

Decrease in Lease receivable on Dec 31, 2018 = $414,389-$217,702 = $196,687

Lease receivable on Dec 31, 2018 = ($5,856,949-$414,389) - $196,687 = $5,245,873

1.	Lease receivable	$5,245,873
2.	Interest revenue	$196,687

3) Lease receivable will replace machine in balance sheet at Dec 31, 2018, it is a non cash transaction in which one asset is converted in to another. A disclosure note will be required for this to balance sheet.

Total principal payments = $414,389*2 = $828,778

First lease payment on Sep 30, 2018 will not include any interest and interest component in another lease payment is $217,702.

Cash inflow for interest portion = $217,702

Cash inflow for principal portion = $414,389+($414,389-$217,702)

= $414,389+$196,687 = $611,076

Finance lease
Interest portion		$217,702
Principal portion		$611,076