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 $576,798 over a 5-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 12.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $4.0 million. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1and 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)?

Answer 1

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Part 1
Semiannual Lease Payment	A*B	$     576,798
Present value of Annuity due of $1 n=10, i=6%	B	7.80169
Selling Price	A*B	$ 4,500,000
Part 2
December 31, 2018 Receivable		$ 3,581,796	From beow Amortization Schedule
Part 3
Sales		$ 4,500,000
Less: Cost of Goods Sold		$ -4,000,000
Profit		$     500,000
Add: Interest Revenue (From below schedule)		$     235,392
Total Income		$     735,392
Working: Amortisation Schedule
Date	Cash	Interest 6%	Principal	Carrying Value
Jun 30 2018				$      4,500,000
Jun 30 2018	$576,798		$576,798	$      3,923,202
Dec 31 2018	$576,798	$     235,392	$341,406	$      3,581,796
Jun 30 2019	$576,798	$     214,908	$361,890	$      3,219,906
Dec 31 2019	$576,798	$     193,194	$383,604	$      2,836,302
Jun 30 2020	$576,798	$     170,178	$406,620	$      2,429,683
Dec 31 2020	$576,798	$     145,781	$431,017	$      1,998,666
Jun 30 2021	$576,798	$     119,920	$456,878	$      1,541,788
Dec 31 2021	$576,798	$        92,507	$484,291	$      1,057,497
Jun 30 2022	$576,798	$        63,450	$513,348	$         544,149
Dec 31 2022	$576,798	$        32,649	$544,148	$                    0