Question

for Georgia-Atlantic to make semiannual lease payments of $545,554 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 $3.8. (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 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? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to nearest whole dollar.)

Answer 1

1)semiannual rates: 8*6/12 = 4%

semiannual months : 4*2 =8

the present value of the lease payments at June 30, 2018 :[PVAD 4%,8* A]

          = [ 7.00205*545554]

        = 3,820,000

right-of-use asset : 3,820,000

lease liability : 3,820,000- 545,554 = 3,274,446

2)Deprecaition : 3,820,000/ 8= $ 477500 per semiannual month

Right of use asset : 3,820,000 - 477,500 = $ 3,342,500

B)Interest : carrying valur of lease on 30june 2018* rate

         =3,274,446 *.04

           = 130978

Principal payment : 545554-130978 = 414576

Lease liability as on 31 dec 2018 = 3274446-414576 = 2,859,870

3)Pretax amount : Depreciation +interest expense

          = 477500+130978

         =608478