Question

In: Accounting

On June 30, 2021, Blue, Inc. leased a machine from Large Leasing Corporation. The lease agreement...

On June 30, 2021, Blue, Inc. leased a machine from Large Leasing Corporation. The lease agreement calls for Blue to make semiannual lease payments of $224,843 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2021. Blue’s incremental borrowing rate is 12%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Large constructed the machine at a cost of $1,232,000. (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 Large is “selling” the machine (present value of the lease payments) at June 30, 2021.
2. What would be the amounts related to the lease that Large would report in its balance sheet at December 31, 2021? (Ignore taxes.)
3. What would be the amounts related to the lease that Large would report in its income statement for the year ended December 31, 2021? (Ignore taxes.)

(For all the requirements, round final answers to the nearest whole dollar amounts.)

1. Present Value---

2. Lease Receiveable---

3. Income---

Solutions

Expert Solution

Date Period Lease payment Present value of lease payments
30-Jun-21 0 $224,843 $224,843 (224,843/1.06^0)
31-Dec-21 1 $224,843 $212,116 (224,843/1.06^1)
30-Jun-22 2 $224,843 $200,109 (224,843/1.06^2)
31-Dec-22 3 $224,843 $188,783 (224,843/1.06^3)
30-Jun-23 4 $224,843 $178,097 (224,843/1.06^4)
31-Dec-23 5 $224,843 $168,016 (224,843/1.06^5)
30-Jun-24 6 $224,843 $158,505 (224,843/1.06^6)
31-Dec-24 7 $224,843 $149,533 (224,843/1.06^7)
Fair value of machine $1,480,002
1. Present value of lease payments $1,480,002
Amortization schedule
Date Beginning balance Interest Lease payment Reduction in lease liability Ending balance
30-Jun-21 $1,480,002 $0 $224,843 $224,843 $1,255,159
31-Dec-21 $1,255,159 $75,310 $224,843 $149,533 $1,105,626
30-Jun-22 $1,105,626 $66,338 $224,843 $158,505 $947,121
31-Dec-22 $947,121 $56,827 $224,843 $168,016 $779,105
30-Jun-23 $779,105 $46,746 $224,843 $178,097 $601,008
31-Dec-23 $601,008 $36,060 $224,843 $188,783 $412,226
30-Jun-24 $412,226 $24,734 $224,843 $200,109 $212,116
31-Dec-24 $212,116 $12,727 $224,843 $212,116 $0
2. Amount to be reported in balance sheet of Large
As on December 31, 2021
Lease receivable $1,105,626
3. Amount to be reported in income statement of Large
Interest income $75,310

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