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 $530,475 over a 4-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 10.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.1 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.)

Answer 1

1)the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018

Let's calculate the present value of lease payments

$530,475 * PV factor annuity due (i=5%,n=8)

$530,475*6.784=$3,600,000

2)

Receivable st december 31,2018
Initial Balance June 30,2018	$3,600,000
June 30,2018 reduction	($530,475)
Dec 31,2018 reduction	($376,999)
December 31 Receivable	$2,692,526

3)

Income Effect
June 2018 interest revenue	$0
Dec 31 , 2018 Interesr Revenue	$153,476
Interest Revenue for 2018	$153,476
Sales Revenue	$3,600,000
Cost of goods sold	($3,100,000)
	$500,000
Income Effect($500,000+153,476)	$653,476

Calculations:

June 30,2018
Lease Receivable(present value calculated above)	$3,600,000
Cost of goods sold(Lessor's cost)	$3,100,000
Sales Revenue(present value calculated above)		$3,600,000
Inventory of Equipment(Lessor's cost)		$3,100,000
Cash(Lease Payment)	$530,475
Lease Receivable		$530,475
Dc 31,2016
Cash(Lease Payment)	$530,475
Interest Revenue(5%* (3,600,000-$530,475))		$153,476
Lease Receivable		$376,999