Question

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---

Answer 1

	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