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 $681,229 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 8%, 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 $4.8.

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?

1.	Present Value
2.	Pre-Tax amount Liability
	Pre-Tax amount for right-of-use asset
3.	Pre-Tax amount for interest expense
	Pre-Tax amount for Amortization Expense

Answer 1

Solution 1:

Semiannual lease payment = $681,229

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 8%, 4% semiannual

Present value of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 4%

= $681,229 * 7.00205 = $4,770,000

Solution 2:

Semiannual payment on 30.06.2018 = $681,229

Pretax amount of liability on 30.06.2018 = ($4,770,000 - $681,229) = $4,088,771

Interest expense for 31.12.2018 = $4,088,771 * 4% = $163,551

Semiannual lease payment on 31.12.2018 = $681,229

Pre tax amount for liability December 31, 2018 = $4,088,771 + $163,551 - $681,229 = $3,571,093

Depreciation on right to use assets for 2018 = $4,770,000 / 4 * 6/12 = $596,250

Pre tax amount of right to use asset to be reported for 2018 = $4,770,000 - $596,250 = $4,143,750

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $4,088,771 * 4% = $163,551

Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement = $4,770,000 / 4 * 6/12 = $596,250